If you’ve been gifting money each year to people you love, or using gifting as a planning tool, it’s about to get even better. In 2023, the amount you can give away takes a healthy jump and as long as your generosity doesn’t exceed the limit, you should stay off IRS radar.
In 2023 the new annual exclusion moves up to $17,000—that’s per person. So, you can give $17,000 to each of your kids, grandkids, in-laws, out-laws, anyone you love, like, or just feel like giving money to, and it won’t trigger the Federal Gift Tax. If you’re married, your spouse can also give $17,000 to those same people for a combined gift, as a couple, of $34,000 per person using IRS “gift splitting” rules. In that case you will probably need to file a gift tax return. Generally though, gift taxes are not required when gift-splitting is involved when the gifts don’t exceed the limit.
What’s Considered a Gift
Gifts can be more than just cash. It can be stocks, bonds, mutual funds—just about anything traded on exchanges–property, shares in a family business, a new car—in other words, almost anything that has a value. And as long as the gift you give doesn’t go over the limit, you’re in the clear. Gifts between spouses are unlimited and usually don’t trigger a gift tax return. And gifts to nonprofits are charitable donations, not gifts, and therefore don’t fall under gifting rules.
Will You Pay a Gift Tax if You Give More Than Allowed
If you do happen to give someone more than the allowable limit, you will have to file a gift tax return, IRS form 709, to disclose the gift, but you may not have to pay taxes. Any excess gift can be subtracted from your lifetime exclusion, which is the amount you’re allowed to give away at your death free of federal estate taxes. In 2023 the lifetime exclusion jumps a whopping $860,000 to $12,920,000, $25, 840,000 for a married couple. The gift tax return keeps track of everything you give during your lifetime that goes above the annual gift limits. Then it gets subtracted from your lifetime exclusion at your death.
What’s the Gift Tax Rate
In the event you use up all your exclusions and have to pay a gift tax, it can be expensive. Gift tax rates begin at 18% and go all the way up to 40%. There are exceptions and special rules for calculating the gift tax. The instructions are contained in IRS form 709.
What Can Trigger a Gift Tax Return
Sometimes your heart is too big and your best-intentioned gift comes back to haunt your taxes, such as putting a large chunk in a 529 plan for a grandchild.
- For example, if you put $85,000 into your granddaughter’s 529 account, you will have to file a gift tax return. However, a special rule allows you to spread one-time gifts across five years’ worth of gift tax returns to preserve your lifetime gift exclusion. So, in 2023, an $85,000 lump sum gift to the 529 plan, spread across five years comes out to $17,000 per year, and does not exceed the annual gifting limit.
- If you pay $40,000 for your child’s wedding, or the expensive honeymoon, the IRS classifies it as a gift and you have to file a gift tax return.
- If you pay tuition or medical bills for someone, pay the school or hospital directly. If you don’t, you’ll have to file a gift tax return.
- Lending money to family or friends, called a laid-back loan, is usually a bad idea. The IRS can make it even worse. The IRS considers interest-free loans as gifts.
- If you loan money to family or friends and later decide they don’t have to pay it back, guess what? The IRS considers it a gift.
- Being added to a non-spouse bank account is another way to trigger a gift tax return. Maybe you help Grandma with her finances. You get added to her checking account as a joint owner because it makes it easier for you to conduct Grandma’s business. Because you have the right to take money out of the account at any time, the IRS says Grandma is giving you a gift.
Do You Pay Taxes When You Receive a Gift
Gift taxes are generally paid by the giver. Seldom does the one receiving the gift have to pay taxes. However, if the assets received later produce income, such as interest, dividends, or rent, that income is claimed on the recipients’ tax return as income and is taxable. Complete details are found in IRS Publication 525.
Year End Strategy
The IRS doesn’t care when during the year you give a gift. The agency’s only question is, how much did you give per person and was it more than the gifting limit. So, if you find yourself near the end of the year and you want to give away more than the allowable limit quickly, consider giving the maximum gift now, and then give the allowable limit for next year immediately in the new year. That way you’ve accomplished what you wanted to do without triggering a gift tax return.
This article is presented as information only and should not be considered financial, tax or legal advice.