When your (very) generous Aunt Betty slips you a $5,000 check on your birthday, do you have to pay taxes on her cash gift?
And when you send an annual donation to your favorite charity or alma mater, does anybody pay taxes on that gift?
The answer in both cases is no, although as silly as it sounds, gift-givers must pay gift taxes on some gifts.
Luckily, recipients never pay a gift tax, and the limits at which the gift tax kicks in for givers are high enough that most people will never pay taxes on their gifts. But as your wealth grows over time, the gift tax may start to affect you.
What Is the Gift Tax?
A gift is when someone gives something of value (cash, property, the use of property, etc.) to someone else without expecting anything in return. Additionally, if you were to sell something you own for considerably less than its fair market value — the price it would normally sell for to a stranger — then this could be considered a gift by the IRS.
For example, if you own a car worth $15,000 and you want to sell it to your brother for $10,000 as a favor to him, the $5,000 difference could be considered a gift by the taxman.
Who Pays the Gift Tax?
A gift’s giver is typically the one responsible for paying gift tax. But tax only applies to those who both exceed the annual gift limit *and* the lifetime limit (see ‘Gift Tax Limit 2023’ and ‘Lifetime Gift Tax Exemption 2023’ below).
It’s important to note that support from your parents or guardians while they can still claim you as a dependent does not constitute a taxable gift. Your parents can give you all the money in the world while they’re claiming you on their taxes and it will never be taxed as a gift. However, as soon as you lose dependency eligibility, their support may be taxed as a gift.
Gifts between spouses also are not subject to the gift tax.
Gift Tax Limit 2023
Before you start tallying up every dime you gave to your niece as a present, don’t worry about it. Most presents to friends and family will fall below the annual threshold for taxable gifts.
For the 2022 tax year, a taxpayer could give up to $16,000 per recipient per year without being taxed on the gift(s). For example, last year you could have given Friend A $15,000, Friend B $15,000, and your sister $15,000 and not be taxed on your gifts this year.
However, if you gave $15,000 to your sister at the beginning of the year, and then another $2,000 to her later that year, your gifts could then be subject to tax, depending on how much of your lifetime estate and gift tax exemption you’ve used up.
For 2023, the limit has been increased to $17,000. Keep this in mind if you’re planning to be generous this year.
Lifetime Gift Tax Exemption 2023
Aside from the annual gift tax limit per recipient, as of 2023 the IRS also lets you gift up to $12.06 million over your lifetime without having to pay any gift tax. This limit also applies to estate taxes.
How does the lifetime gift tax exemption work? Let’s take a look at the earlier example, where you gave $17,000 in gifts to your sister. That crossed the annual limit of $16,000 for that year, so you would have needed to file a gift tax return with the IRS. But you wouldn’t have had to actually pay gift tax, because the $1,000 that you went over the annual limit is way, way under your lifetime limit, where you still have a whole $12.059 million worth of tax-free gifting to work your way through.
So, as you can see, unless you regularly throw around five-figure gifts — and you’ve been doing that for a long time — you probably don’t have to worry about paying gift tax.
If one day you do exceed the annual limit in any given year and the lifetime limit, your tax rate will range from 18% to 40%.
How to Avoid Gift Tax
The best way to avoid the gift tax, or rather, to avoid eating into your lifetime tax-free gift limit, is pretty self-explanatory: In 2023, don’t give gifts that exceed $17,000 per recipient per year.
But if passing this annual mark is for some reason unavoidable, there are other strategies you can employ to (legally) avoid filing a gift tax return with the IRS.
We’re all entitled to our own individual $17,000 annual exclusion per gift recipient. This means that your mother and father could each give you $17,000 this year — for a total of $34,000 — without being taxed on that gift. This is referred to as “gift splitting.”
Although the estate tax (the taxation of an individual’s assets after they die) is an entirely different subject, it ties in well with the gift tax, considering the lifetime exemption applies to both gifts and estate transfers. Many people who want to avoid the lofty estate tax when they die elect to slowly give their assets and money as gifts as they get older.
Give a Gift That “Doesn’t Count”
Luckily, the IRS understands that some gifts benefit society as a whole rather than only one recipient, so a number of gifts are excluded from the gift tax entirely. There are unlimited exclusions (they are never taxable) for the following gifts:
- Charitable gifts
- Gifts to political organizations
- Educational and medical gifts (see explanation below)
To receive the gift tax exemption for educational and medical gifts, you must give this gift directly to the medical or educational institution.
For example, if your aunt is having surgery that will cost $50,000 and you want to provide your aunt with the money for the surgery, you must give the $50,000 directly to the hospital. You may not give this money to your aunt or you will be subject to gift tax on the amount that exceeds $17,000. This same rule applies to educational gifts (for example, if your friend or family member is attending college).
Also, note that charitable gifts may be eligible to be claimed as an itemized deduction on your individual income tax return.
How Much Is Gift Tax on a Car?
Gift tax applies to gifted cars in the same way it applies to any other gift. If the car’s value exceeds the annual gifting limit and the giver has passed their lifetime exemption of $12.06 million, the car will be taxed at a rate between 18% to 40%.
How Much Is Gift Tax on a House?
Gifted houses will of course exceed the annual gift value maximum. If the giver has already maxed out their lifetime gift exemption, a home they give to someone will be taxed up to 40%.
Do I Pay Tax on Gift Money from Parents?
Typically you don’t have to pay tax on gift money from your parents, as gift tax is usually applied to a gift’s giver and not its recipient.
And if your parents are still claiming you as a dependent on your taxes, they don’t have to pay tax on any gifts they give you, no matter how large.
If your parents are not claiming you as a dependent, their gifts to you will be subject to the annual and lifetime gift maximums before being taxed.
Overall, the gift tax does not affect very many people in their teens or twenties. So don’t worry about that $20 you gave to your brother for his last birthday. It won’t be taxed (under current tax law, anyway).
The same is true if you receive a larger gift from a generous relative…as long as it’s less than $17,000 per year. The gift tax can be easily avoided throughout life just by following certain limitations set out by the government.
Now that you have all the facts about the gift tax, don’t be afraid to get generous this year!