How Does a Gift Tax Work?


Gifting is a powerful tool in estate planning. If you’re considering estate planning gifting strategies, it’s in your best interest to contact a knowledgeable Montgomery County Estate Planning Attorney, who can help you reduce the size of your taxable estate and provide financial assistance to your loved ones. Please continue reading to learn about the annual gift tax exclusion and lifetime exclusion work.

What is the Gift Tax?

According to the Internal Revenue Service (IRS), the gift tax is “a tax on the transfer of property by one individual to another, while receiving nothing, or less than full value, in return.” Essentially, if you give property or money to another or use income from property without expecting to receive something of at least equal value in return, it’s considered a gift. When calculating how much you can give away in gifts before owing taxes, you must consider the annual and lifetime gift tax limits.

If you exceed the annual gift tax exclusion, you must file a gift tax return with the IRS. The remainder of your contributions will be included in your lifetime gift tax exclusion. The 2023 federal gift tax limit is $17,000, and the lifetime gift limit is $12.92 million. If you gift more than this amount, you must file a federal gift tax return. However, if you exceed the annual exclusion, you may not have to pay any taxes unless you have also exceeded the lifetime gift tax exclusion. The 2024 gift tax limit is $18,000, and the lifetime gift limit is $13.61 million. It’s crucial to understand that you will only pay a gift tax on the amounts that exceed the allotted lifetime exclusion. The gift tax rate ranges from 18% to 40%.

How Does the Annual Gift Tax Exclusion Work?

The annual gift tax exclusion is a set amount by the IRS, which determines how much you can gift someone without having to report it on a gift tax return. If you exceeded the annual gift tax exclusion in cash or assets, such as stocks or land, to any one person during a fiscal tax year, you will need to file a gift tax return alongside your federal tax return the following year. Essentially, you have to disclose the gift with the IRS.

It’s important to understand that the annual gift tax exclusion is per recipient. This means the total sum of all your gifts doesn’t have to be $18,000. Instead, you can give $18,000 to your sibling, $18,000 to a friend, $18,000 to your cousin, and so on in 2024 without filing a gift tax return in 2025. However, gifts between spouses are unlimited, meaning they don’t require a gift tax return to the IRS.

How Does the Lifetime Exclusion Work?

The lifetime gift tax exclusion is a set amount of money the IRS permits you to give away throughout your lifetime without paying the federal gift tax. As mentioned above, you get a $12.92 million lifetime exclusion in 2023 and $13.61 million in 2024. Therefore, let’s say you give your sibling $60,000 in 2024; you have exceeded your $18,000 annual gift tax exclusion. This means you will need to file a gift tax return. However, you likely won’t have to pay a gift tax. This is because the extra $42,000 will count against your lifetime exclusion. During the following year, if you give your sibling another $60,000, this will add to another portion of your lifetime exclusion. Ultimately, if you don’t gift anything during your lifetime, you have your entire lifetime exclusion to use against your estate after your death.

For more information regarding gift taxes, please don’t hesitate to contact JD Katz.