Many parents and grandparents give their children and grandchildren monetary gifts during the year. They may give them money for a down payment on a home, to buy a car, or to help them out in other ways. But when are these gifts of taxable importance? The respected estate planning lawyers at Skeeters, Bennett, Wilson & Humphrey want to make sure you know the specifics of gifts, associated taxes, and exclusions.
When You Don’t Have to Pay Gift Tax
According to the Internal Revenue Service (IRS), in 2023, a person could give gross gifts of $17,000 or less to another individual with no tax effect. There are no reporting requirements, nor do you have to file a gift tax return. If your spouse joins in the gift, then the allowable gift amount increases to a maximum of $34,000 for a recipient. This status applies to each donee: for example, if you want to give each of your three children a monetary gift each year of say, $10,000, you’ll have no tax effect on each individual gift.
Keep in mind that as IRS regulations change, so does the annual allowable gift amount. Always confirm it with your tax advisor before issuing a monetary gift to a donee. But as long as your gifts don’t exceed the IRS's maximum annual exclusion per individual for a specific calendar year, you’re not obligated to pay a gift tax.
This benefit applies to spouses as well. Spouses can give an unlimited amount of money to each other under the gift tax marital deduction rules, and there are no gift tax forms to be filed or any gift tax to be paid. To be eligible for the 100 percent marital deduction concerning gifts, the spouse must be a U.S. citizen.
Payments of medical expenses and tuition payments are also excluded from federal gift tax requirements. Contributors to a qualified tuition program that exceed the maximum annual exclusion gift amounts may treat the gift as if it had been made over a five-year period. For example, instead of only gifting $17,000 for tuition expenses in 2023, another $17,000 next year, and so on, you’d be allowed an $85,000 exclusion in any one year—a one-time maximum exclusion aggregate gift amount. This, too, depends on the IRS guidelines for maximum exclusions in any given year.
You’re also allowed lifetime exclusion gift amounts. This might be a viable option as you and an estate planning attorney structure the details of your assets in relation to what your family can inherit.
Another important note: any gift deductible for income tax purposes is also deductible for gift tax purposes and doesn’t count towards the $16,000 annual gift tax exclusion. The gift tax charitable deduction is unlimited. Additionally, the gift tax charitable deduction isn’t limited to domestic organizations or to gifts for use within the United States.
When You Might Have a Gift Tax Obligation
If a gift or the aggregate of gifts in any one year is more than the IRS’s annual exclusion amount to anyone other than a spouse, then a gift tax return must be filed. The federal gift tax rates are the same as the federal estate tax rates, and can fluctuate from year-to-year.
However, there are also gift tax credits that help to shelter a certain amount of taxable gifts in excess of the annual exclusion amounts. So it's a wise decision to partner with a knowledgeable attorney who can help strategize the amount and frequency of your gift amounts in relation to your future estate planning goals.