This comprehensive guide will walk you through everything you need to know about the current gift tax rates, laws, and exemptions, so you can make informed gifting decisions with confidence. So no more guesswork or confusion, just clear, concise information to help you gift freely and with peace of mind.
What is Gift Tax?
A gift tax is a federal excise tax imposed on an individual who gives money or property to another person without receiving equal value in return. The other person is someone other than a spouse or dependent. The gift tax rate starts at 18% and can reach up to 40% depending on your gift value.
The giver is typically responsible for paying the tax, while the recipient may have to pay capital gains tax if he/she sells their gifted property in the future. The IRS considers a gift as a transfer of property if you do not receive equal value in return, including money or assets such as stock or real estate.
The gift tax was introduced in 1924 to prevent wealthy families from avoiding estate taxes through lifetime transfers to their children. And in 2023, the federal gift tax law allowed individuals to gift up to $17,000 tax-free. So in that case, if the gift value exceeds $17,000, the Internal Revenue Service (IRS) may impose a gift tax on the portion above $17,000. It’s important to note that state governments do not impose gift tax.
Who needs to pay the Gift Tax?
Usually, gifts and inheritances are not considered taxable income at the federal level. However, any income generated from received assets, such as interest, dividends, or rent, may be taxed. The details are in IRS Publication 525, although verify beforehand if your state is exempted at the federal level or not, as some states do have inheritance taxes.
Important Tips to Remember
If you have exhausted your gift tax exclusion, you may be subject to the gift tax, which ranges from 18% to 40%. The giver is typically responsible for paying the tax. However, there are exceptions and specific calculation rules that apply, so it’s recommended to review the instructions of IRS Form 709 for complete information.
Unwrapping the Mystery of Gift Tax Rates: Let’s Do the Math
The federal gift tax is only applicable to individuals with substantial wealth to give away. For those who fall into this category, calculating gift tax liability is manageable. Gift tax rates follow a marginal system, with a top rate of 40%. The amount of gift tax owed increases with the size of the gift, but it’s only due after a person exceeds their lifetime exemption limit. For gifts above the annual exclusion limit ($16,000 in 2022 and $17,000 in 2023), the giver can use the tax brackets to determine their liability
Gift Away, Tax-Free: Know Your Exemptions!
- The gift tax is not applied to all gifts. Exemptions include gifts to a U.S. citizen spouse, gifts under the annual exclusion limit, gifts to political organizations, tuition payments made directly to an institution, medical expenses paid directly to a facility, and gifts to certain tax-exempt organizations.
- For non-U.S. citizen spouses, the maximum gift tax-free amount is $175,000 as of 2023.
- The gifts to tax-exempt organizations cannot be counted towards any limit.
How to file a Gift Tax Return
If a gift exceeds the annual exclusion limit, the giver must file a gift tax return (Form 709) with the IRS. He/She is responsible for paying the gift tax unless the state requires the recipient to pay inheritance tax. On each gift tax return filed, the lifetime exclusion limit is reduced, unless the giver opts to pay the gift tax immediately. Most people never reach their lifetime limit, so paying the gift tax right away is unlikely. Gift tax rates range from 18% to 40%, following the same marginal tax brackets as federal income tax. The giver can request a free tax transcript from the IRS to get a copy of their tax returns and determine their remaining lifetime exclusion.
Gift tax rates
| Value of gift in excess of the annual exclusion | Tax rate |
|---|---|
| $10,000 or less | 18% |
| $10,001 to $20,000 | 20% |
| $20,001 to $40,000 | 22% |
| $40,001 to $60,000 | 24% |
| $60,001 to $80,000 | 26% |
| $80,001 to $100,000 | 28% |
| $100,001 to $150,000 | 30% |
| $150,001 to $250,000 | 32% |
| $250,001 to $500,000 | 34% |
| $500,001 to $750,000 | 37% |
| $750,001 to $1 million | 39% |
| More than $1 million | 40% |
