Gift tax is probably the most confusing terminology when it comes to taxes.
Because, in most cases, you don’t actually pay gift tax.
Wait… what?
Yeah, you read that right.
Let me explain –
EXCLUSIONS OF GIFT TAX
But first, let’s cover some basics of gift tax.
A gift is considered any transfer to an individual (directly or indirectly) where full consideration is not received in return. The gift tax applies to any type of property.
You make a gift when giving property (including money), the use of or income from property, if you sell something at less than its full value or if you make an interest-free or reduced-interest loan.
However, there are some gifts that are excluded from gift tax:
- Tuition and medical expenses that you pay for someone.
- Gifts to your spouse.
- Gifts to a political organization for its use.
- Gifts that do not exceed the annual exclusion for the calendar year.
The annual exclusion for gift tax for 2022 is $16,000 per donor and donee.
That means that each taxpayer can give $16,000 to each donee without it being subject to gift tax.
Download the Gift Tax Guide as a reference.
Here’s what that looks like –
SINGLE TAXPAYER
A single taxpayer can give a $16,000 gift to a person without it being subject to gift tax.
MARRIED TAXPAYERS
Married taxpayers can give, together as a couple, a $32,000 gift. Each spouse can give $16,000, therefore together they can give $32,000 to a person without it being subject to gift tax.
GIVING TO MULTIPLE PEOPLE
The same rules apply when giving to multiple people.
The single taxpayer can give $16,000 to each person without it being subject to gift tax.
The married taxpayers can give $32,000 to each person without it being subject to gift tax.
If the single taxpayer has three children, then the single taxpayer can give $16,000 to each child, $48,000 total.
If the married taxpayers have three children, then the married taxpayers can give $32,000 to each child, $96,000.
EXCEEDING THE ANNUAL EXCLUSION
Now, what happens when you go over that annual exclusion? What does it really mean when something is subject to gift tax?
Because we already know that you don’t really pay gift tax… in most cases.
So, what actually happens?
How about we use our single taxpayer in this example.
Our single taxpayer gives their child a $46,000 gift in 2022.
The annual exclusion is $16,000 for that calendar year.
The amount subject to gift tax would be the amount gifted less the amount excluded.
| Amount Gifted | $46,000 |
| Annual Exclusion | $16,000 |
| Amount Subject to Gift Tax | $30,000 |
Therefore, the amount subject to gift tax is $30,000.
This is the first time the single taxpayer has ever gifted over the annual exclusion.
So, if the single taxpayer doesn’t actually pay gift tax, then how is the $30,000 subject to it?
The single taxpayer will need to file a Form 709 to report the amount gifted. This will allow the IRS to track the amount gifted over the annual exclusion and reduce the taxpayer’s lifetime estate tax exclusion.
In 2022 the federal estate tax exemption increased to $12.06 million (24.12 million for married taxpayers).
This means if you die, and your estate is less than $12.06 million, your estate will not be subject to federal estate tax. Your estate may still be subject to state estate tax.
Any amount over the $12.06 million will be subject to federal estate tax. When you give over the annual exclusion, instead of paying gift tax, you reduce your lifetime estate tax exemption.
In this case, the single taxpayer will reduce their lifetime estate tax exemption by $30,000, making their new lifetime estate tax exemption $12.03 million.
In extreme cases, where taxpayers give over their lifetime estate tax exemption, then they will actually pay the gift tax when filing Form 709.
Below are the 2021 tax brackets for gifting over the lifetime estate tax exemption.
| Column A | Column B | Column C | Column D |
| Taxable amount over – | Taxable amount not over – | Tax on amount in column A | Rate of tax on excess over amount in column A |
| – | $10,000 | – | 18% |
| $10,000 | 20,000 | $1,800 | 20% |
| 20,000 | 40,000 | 3,800 | 22% |
| 40,000 | 60,000 | 8,200 | 24% |
| 60,000 | 80,000 | 13,000 | 26% |
| 80,000 | 100,000 | 18,200 | 28% |
| 100,000 | 150,000 | 23,800 | 30% |
| 150,000 | 250,000 | 38,800 | 32% |
| 250,000 | 500,000 | 70,800 | 34% |
| 500,000 | 750,000 | 155,800 | 37% |
| 750,000 | 1,000,000 | 248,300 | 39% |
| 1,000,000 | – | 345,800 | 40% |
Follow along for more tax tips this tax season!
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