If you’re thinking about giving a significant gift to your adult child or even a complete stranger, there’s some information you should know first. According to the IRS, “gifts” include cash, real estate, and other forms of property. The gift tax is a federal tax on the transfer of property from one person to another while receiving nothing, or less than full value, in return.
Important facts to know:
1. Sometimes There’s No Gift Tax
There’s an annual gift tax exclusion set by the IRS. In 2023, the person giving the gift doesn’t have to pay a gift tax if the gift is $17,000 or less per person per year. So, if you give your son $12,000 to pay for a car, you won’t have to pay a gift tax. You could actually give up to $17,000 to as many different people as you want in a year without incurring a gift tax.
The gift tax exclusion amount can change every year, so if you decide to give a gift next year, make sure you’re up to date on what the exclusion amount is at that time.
2. Married Couples Can Double that Amount
The gift tax exclusion amount for a married couple is $34,000 in 2023. So, if you and your spouse are splitting a gift to your son, together you could give him a total of $34,000. That means each spouse could give a gift of up to $17,000 to someone and not incur a gift tax.
3. Sometimes a Gift Must be Reported to the IRS
What happens when you give a gift that’s over $17,000 for the year? Well, that will involve a gift tax, which requires filing a form with the IRS. Form 709 must be filed if you give any gift greater than $17,000 to an individual in a single tax year. That form would need to be filed by April 15th in the following tax year.
4. Any Gift Tax is the Responsibility of the Person Making the Gift
If you decide to give your adult daughter $20,000 to buy a house, the IRS considers that a gift. Since this gift is over the $17,000 exemption amount, the gift tax would be your responsibility since you’re giving the gift.
5. Even Gifts Reported to the IRS Don’t Always Result in a Tax Payment
Let’s say you gave your daughter $20,000 in a tax year, so you have to file Form 709. Does that mean you’ll have to pay a gift tax while you’re living? Maybe not.
The reason why is that the IRS also has a lifetime amount of gifts that you can make before you have to pay a gift tax. In 2023, a person can transfer up to $12.92 million to heirs, during life or at death without triggering a federal estate-tax bill. If a person passes away in 2023, as long as that person hasn’t gifted more than $12.92 million in their lifetime, they won’t owe a gift tax. For married couples, the combined limit allows transfers up to nearly $26 million for 2023.
The government created this lifetime gift tax so wealthy people could gift large amounts of money simply to avoid inheritance taxes. However, be aware that at the beginning of 2026, the current expectation is that the gift tax exemption ceiling will be halved, falling back to their 2017 levels of around $5 million per individual, plus adjustments for inflation.
6. Gifts from One Spouse to Another Can Be Unlimited
In general, when one U.S. citizen gives a gift to their spouse who is also a citizen, it falls under the unlimited marital deduction, and a gift tax is rarely triggered. This applies both during your lifetime and upon your death
The annual amount one spouse can give to their spouse who is not a U.S. citizen is $175,000 in 2023.
Many people use a gifting strategy as part of their estate plan. We’re here to help you determine the best estate plan for your needs and we can also give you guidance in regard to your gifting strategy, which may even include charitable giving, an irrevocable trust, or other options. Contact us today to get your free initial consultation.