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Gift Tax and What It Is and How Much You Can Gift Tax-Free

Luvara Law Group LLC March 7, 2024

What Is a Gift Tax?
A gift tax is a federal tax imposed by the Internal Revenue Service (IRS) on individual taxpayers who transfer property to someone else without receiving anything of substantial value in return. Gifts can take various forms, including cash, real estate, and other forms of property. However, the IRS limits how much you can transfer to someone as a gift.
In order to prevent people from avoiding paying income taxes, the federal government created the federal gift tax. This tax prevents undue hardship and obliges donors and recipients to honor IRS tax liability.
Any amount over this threshold must be reported and applied toward a lifetime gift tax exemption. Once you exceed this limit, the gift tax becomes payable. The gift tax can be imposed even if you never intended the transfer to be a gift.
How a Gift Tax Works
Since a gift may be anything of value that is transferred from one individual to another. Accordingly, the transfer may occur "either directly or indirectly, where full consideration, valued in money or worth) is not received in return."

  • Gift tax is a federal tax levied on a taxpayer who gives money or property to someone else.

  • A gift is understood as anything of substantial value, such as cash and real estate, for which the donor doesn't get anything substantial in return.

  • The IRS sets limits on how much taxpayers can gift to others annually and over their lifetime without incurring the gift tax.

  • All gifts must be reported regardless of whether they trigger the gift tax.

Gift splitting and gifts given in trust are two strategies to avoid incurring the gift tax. Property is considered a gift if it has value and is transferred to another individual without any significant form of compensation.
The IRS sets limits to how much people can gift annually and during their lifetime. I person can give up to $17,000 to most individuals in 2023 and $18,000 in 2024 without being taxed. There is no limit on the number of individuals you can gift in this manner in a given year. So if you have 10 children, you can gift as much as $18,000 per child in 2024 for a total of $180,000, without needing to pay a gift tax for the year (unless you surpass the lifetime limit). The lifetime limit is $13.61 million for 2024.
If you are a married couple, filing jointly, you can transfer up to $34,000 per individual in 2023, or $36,000 in 2024.5 You are taxed if you go over your annual exclusion limit and that amount counts toward your lifetime limit.
As a donor, you are responsible for reporting any gifts you make by filling out Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return even if the gift falls under the annual limit. This form must be attached to your annual tax return by the tax filing deadline of the year after the gift was made, which is typically April 15
Gift tax rates are based on the size of the taxable gift and can range between 18% and 40%.7 In cases where the value is not immediately evident, such as art or stocks, you must use the fair market value (FMV) of the asset to assess your tax liability.8

An individual can gift an unlimited amount tax-free if your spouse is a U.S. citizen. If the spouse is not a U.S. citizen, then tax-free gifts are limited to an annually adjusted value— $175,000 in 2023 and $185,000 in 2024.
Some things are not gifts at all. These are:
Educational expenses for someone else
Medical expenses for someone else
Gifts and donations to political organizations
There are strategies for avoiding or minimizing the gift tax. tthe key ways to avoid this tax below.
Gift Splitting
One of the great benefits of being married is that it allows a doubling of gifts. Remember, the annual exclusion applies to the amount of gift that an individual can give someone else. This means that even if they file a joint tax return, spouses can each give $17,000 in 2023 and $18,000 in 2024 to the same recipient. This effectively doubles the allowable tax-free gift to an individual from a married couple. This strategy is known as gift splitting and enables wealthy couples to give substantial annual gifts to children,
grandchildren, and others. This gift can be in addition to, say, tuition paid directly to a grandchild’s school or college, which is exempted outright from the gift tax.

The gift tax exclusion usually doesn’t apply to money distributed by gift in trust conveyances. But donors can give gifts in excess of the annual exclusion without paying taxes by establishing a special type of trust to receive and distribute the funds. There is a special version of a trust, referred to Crummey trust is the usual arrangement.
This allows the beneficiary to withdraw the assets within a limited time period such as 90 days or six months. This gives the beneficiary what the IRS calls a present interest in the trust and this sort of distribution can qualify as a nontaxable gift. Of course, the recipient can only take out a sum equal to the gift given to the trust.
An individual can gift more than the annual exclusion without reducing your lifetime gift tax exemption under certain 529 college savings plans. In these cases, you report this single large gift as being spread over five years on your tax return and file the form each year.