It’s that time of year when everyone is giving gifts, and sometimes that means cash. However, gifts can also be cars, jewelry or investments. So while you probably don’t have to worry about Uncle Sam wanting his part, there’s always a chance.
Understanding the gift exclusion limits and what will happen to your taxes if your gifts are taxable is important. Gift tax won’t apply to most people, but knowing what you could be liable for is important.
Who Pays the Gift Tax?
It’s important to know, especially as the gift giver, that the person giving the gift pays the taxes. This means you aren’t burdening your recipient with more taxes by gifting them money. But again, this doesn’t apply to most people since the lifetime exclusion is so high.
What happens, though, is any amount you gift over the individual exclusion reduces your lifetime exemption. So if you gift $25,000 to someone, you’d decrease your exemption by $9,000. However, most people don’t use their entire exemption in their lifetime.
The Annual Limit for Gift Giving
In the IRS’s eyes, all gifts are taxable, but there is an annual and lifetime exclusion. For example, in 2022, you can gift up to $16,000 per person without worrying about taxes or filing a gift tax return. This means you can give $16,000 to multiple people and not increase your tax liability.
The limit is per person too. So if you are a married couple, you can each gift $16,000 to the same person and not pay taxes. In addition, if you’re gifting money to a married couple, you can each gift $16,000 to each person, for a total of $64,000 tax-free.
Lifetime Maximum for Gift Giving
There’s another exclusion that could prevent you from paying taxes on your gifts: the lifetime exemption. In 2022, the limit is $12.06 million. The lifetime limit only applies to gifts that exceed $16,000.
For example, if you gift a relative $25,000, that’s over $16,000, so technically the $9,000 over the limit should be taxed. However, no taxes are owed unless you’ve exceeded your $12.06 million exemption for your lifetime.
A Gift Tax Return May be Necessary
If you gift someone more than the annual limit, you must complete IRS Form 709. You must complete the form even if you don’t owe any money because you haven’t exhausted your lifetime limit.
The form is necessary to keep track of how much of your lifetime limit you’ve used. Form 709 is due with your tax return in the April following the year you gave the gift. If you’re married, both spouses must file a separate Form 709.
The bottom line is that most gifts aren’t taxable unless you reach the annual and lifetime limits. High net worth individuals may reach the threshold, but most don’t.
The key factor is to keep track of the gifts you give and to file Form 709 each time you gift more than the annual limit. The limits change annually, but you can consult with Henson and Murtha CPAs about the current limits and what steps you must take when you give financial gifts.