It is very rare for an ordinary household to owe money on gifts.
The gift tax has a somewhat complicated two-tiered structure. Each year you can declare an annual amount (the “annual exclusion”) without paying or even reporting anything on your taxes. Then you will have a significantly higher total amount that you can give away during your lifetime without owing tax (the ‘lifetime exclusion’). If you give away your entire lifetime exclusion in a given year, you will owe gift taxes on any amount you donate over the annual exclusion. The result is that the IRS will only tax one-for-one gifts worth $18,000 in 2024. By 2025, that will rise to $19,000. But the lifetime exclusion also needs to be taken into account, and there are ways to give couples more.
For example, suppose you want to give $65,000 to your daughter and her husband. In most, but not all, cases you will not owe any tax. In some cases, you may need to file some additional paperwork with the IRS, even though you don’t necessarily owe any money. Here’s what you need to know. You can also use this free tool to match with a financial advisor if you are interested in personal financial guidance.
Gift and inheritance taxes are a joint tax that is applied to all unilateral transfers. This means that it can apply when you gift someone property without receiving anything of equal value in return. In most cases this involves three situations:
The term “transfer of peppercorns” or “promise of peppercorns” is a legal expression. It refers to selling something in exchange for a peppercorn, which means you technically get something in return, but nothing of any real value. For example, suppose you have a house appraised at $500,000, and you sell it to your friend for $10. While this would technically be a sale rather than a gift, it would also constitute a gift worth the $499,990 you actually gave them.
When the gift tax applies, it is imposed on the person making the gift, and not on the person receiving the gift. Gift tax has rates ranging from 18% to 40% of the taxable donation. However, most people will never pay the gift and inheritance taxes. The reason for this is the tax exclusions.
The gift tax has two major exclusions: the annual and the lifetime exclusions. In any given year, you only pay tax on the portion of a gift that exceeds that year’s annual exclusion, and only to the extent that such gift also exceeds your remaining lifetime exclusion.
The annual gift tax exclusion is an amount that you can donate annually to each recipient. In most cases, you don’t even have to report gifts under the exclusion amount on your taxes. These can exist simply as informal transfers. The only significant exception to this reporting requirement is when married couples make joint gifts that exceed one spouse’s annual exclusion.
The annual exclusion amount is adjusted upward each year to keep pace with inflation. In 2024 this will be $18,000 and in 2025 $19,000.
The annual exclusion applies per recipient, per donor. This means that as an individual you can give away $18,000 per person to as many people as you want without reporting it on your taxes. As a married couple, you can collectively give away $36,000 per person to as many people as you want.
The annual exclusion only applies to transfers made in the current year. This means you can give away every year until the annual exclusion, regardless of previous donations. For example, suppose you give away $18,000 to your daughter in 2024. In 2025, you can give away $19,000 tax-free, as your 2024 donation will not apply to your 2025 taxes.
A financial advisor can help you keep track of gift tax rules and other laws as they change over time.
The lifetime gift tax exclusion is the amount you can give away tax-free throughout your life. It also applies to your estate, meaning your estate will be tax-free up to the extent of your remaining lifetime exclusion.
The lifetime exclusion is cumulative. It includes all tax returns you have filed during your lifetime. It’s also per donor rather than per recipient, meaning it applies to all gifts you’ve given to all recipients in total. This is in contrast to the annual exclusion, which is a complete exclusion that applies to every recipient.
When you give a gift above the annual exclusion, you declare this on your taxes. The amount of your gift in excess of the annual exclusion is then applied to your lifetime exclusion. If you give a gift that exceeds your lifetime exclusion, the excess will be taxed.
Unlike the annual exclusion, the lifetime exclusion is not reset or extended. This is the total amount you can donate tax-free during your lifetime. That said, it is adjusted upward each year for inflation. In 2024, the lifetime exclusion will be $13.61 million. By 2025, this will rise to $13.99 million. So let’s say you gave away your entire lifetime exclusion in 2024. In 2025, you could donate an additional $38,000 thanks to the increased limit ($13.99 million – $13.61 million).
Or, for example, suppose you give three people $20,000 each in 2024. For each of these recipients, the first $18,000 would fall within the annual exclusion and not trigger a tax event. The remaining $2,000 per person would exceed the annual exclusion. This would apply cumulatively to your lifetime exclusion, reducing it by $6,000. You pay no money for these gifts, and your lifetime exclusion could drop from $13.61 million to $13,604,000. Then, in 2025, it would be adjusted upward to $13,984,000 (the 2025 lifetime exclusion of $13.99 million – your lifetime donation of $6,000).
Just like the annual exclusion, the lifetime exclusion applies per person in the household. This means that if you are married, you will have a combined lifetime exclusion of $27.22 million in 2024. However, keep in mind that the possible end of the Tax Cuts and Jobs Act could significantly reduce your lifetime annual exclusion as early as 2026.
As explained by Arron Bennett, CFO and tax strategist at Bennett Financials, in our case you are on solid ground. You and your partner can make this gift completely tax-free.
Because the 2024 gift exclusion allows you to give up to $18,000 per recipient, he said, “you can give $18,000 to your daughter and $18,000 to her spouse without any tax consequences. If you are married, your spouse can also give $18,000 to each recipient , doubling the exclusion to $72,000 total. For a gift of $65,000… if you are married, you and your spouse can also ‘split’ the gift, each giving $18,000 to your daughter and $18,000 to your husband, for a total of $72,000.”
In other words, Bennett said, “if you’re married, you can give the $65,000 gift completely tax-free.”
But he cautioned that gift taxes can be complicated. Consulting a financial planner is generally the best way to ensure compliance.
Splitting gifts does raise one problem. Because your household gave more than the annual exclusion, you must report this gift on your taxes using Form 709. Otherwise, as long as you and your spouse give this gift together, it won’t even affect your lifetime exclusion. You can each separately give $18,000 (or $19,000 in 2025) to your daughter and her husband. Then your partner can do the same.
If you’re giving this gift alone, it’s a slightly different story. In that case, you have an annual exclusion of $18,000 per person, so you can give your daughter and her husband $36,000. You then have to choose between giving the rest of the $65,000 this year and reducing your lifetime exclusion by $29,000 (the excess) or waiting until your annual exclusion resets next year and making the same gift again. Consider talking to a financial advisor if you need help navigating rules and paperwork.
The gift tax is a tax levied on all unilateral transfers or on any sale of assets significantly below market value. However, it also comes with extremely high exclusions, meaning you can give away more than $13 million before you ever have to worry about it.
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Very few households will ever have to worry about gift taxes or estate taxes. These are taxes that only apply to wealthy households with tens of millions of dollars in assets to transfer. But if that applies to you, it’s never too early to start thinking about how to minimize those taxes in your will.
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