The gift tax is a tax on certain property transfers in which the person making the gift receives nothing or less than equal value in return.
Based on the current annual and lifetime gift tax thresholds, the vast majority of Americans do not need to worry about paying gift tax. Their gift value will either be below the annual gift tax threshold, or they will be able to deduct the value from their lifetime gift tax exclusion without exhausting that benefit.
What qualifies as a gift for gift tax?
Without going all the way down the rabbit hole on tax code, a “gift” could be the exchange of any asset – cash, real or tangible personal property, digital assets or other rights – that you give to someone for less than equal value in return.
If the difference between the fair market value of the gift and the value received in return is greater than the gift tax threshold, the person making the gift may need to pay tax on that amount.
For example, a $50,000 down-payment paid by a parent for his or her child’s first home would be considered a gift for IRS tax purposes. While there are certain ways to reduce or eliminate tax on this gift, the parent would need to track and report the gift to the IRS.
What is the gift tax amount for 2022?
Each year, the IRS establishes a certain dollar threshold above which gifts to any one individual must be reported. For 2022, the gift tax threshold is $16,000.
The Gift Tax is on a per gifter per recipient basis. This means that you could give up to $16,000 to your brother, $16,000 to your sister, $16,000 to your child, and $16,000 to your friend or anyone else without paying any tax. If you’re married, you and your spouse can elect to both use your individual gift limit to double the exclusion threshold to $32,000.
Returning to our earlier example of the parent covering the $50,000 down-payment, if that parent’s spouse elects to also use his or her gift tax exclusion amount, the taxable amount reported would be $18,000 ($50,000 - $32,000) as opposed to $34,000 when only one individual makes the gift.
Reducing or eliminating the gift tax
The vast majority of Americans do not need to worry about paying gift tax.
With the 2022 Gift Tax Exclusion Amount set at $16,000 ($32,000 for married couples), most gifts come nowhere near the taxable amount. Several traditionally large ticket family spending items are also specifically exempt from the estate tax, including:
- Medical expenses, tuition, and other education expenses, provided that you pay the institution directly
- Gifts to your spouse in any amount, if your spouse is a US citizen. If your spouse is not a US citizen, you may gift up to $164,000 for 2022 to your non-citizen spouse tax free
- Gifts to a qualifying charity
- Gifts to a qualifying political organization
What happens if I make a gift above the gift tax threshold?
Gifts to an individual that exceed the $16,000 individual or $32,000 married couple tax threshold and don’t fall into one of these exempted categories are subject to tax and must be reported to the IRS through IRS Form 709, but you don’t necessarily need to pay anything (yet). On your Form 709, you can elect to have the gift value deducted from your lifetime gift threshold. As long as you don’t use up all of your exemption amount, you won’t have to pay federal gift tax on your gift now or in the future.
The lifetime gift tax threshold is equal to the federal estate tax threshold, which is $12.06 million for 2022. For someone who passes away in 2022, this means that you won’t pay any gift tax on your prior elections so long as the total value of your gifts and estate is less than $12.06 million.