February 8, 2022
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For 2021, the annual gift tax exemption was $15,000 per recipient. In 2022, that number went up to $16,000. You can give up to $16,000 to as many people as you want during the coming year without any of it being subject to a gift tax. The IRS imposes the gift tax if you transfer money or property to another person without receiving at least equal value in return. Examples include parents giving their children cash, the gift of property like a house or a car, or any other monetary transfer. There is a lifetime exclusion of $11.7 million for 2021 and $12.06 million in 2022. To receive help with the gift tax or any other personal finance issues, you may have, consider working with a certified wealth advisor to help develop your financial team of experts.
What Is the Gift Tax?
Gift tax is a federal tax on monetary or property transfers to other people while getting very little (or less than full value) in return. A very small amount of tax payers.
Gift Tax Limit: Annual
In the 2022 tax year, the annual gift tax exclusion is $16,000 - the amount of money you can give as a gift to one person in any given year without paying any gift tax. You will never pay taxes on gifts that are equal to or less than the annual exclusion limit.
- For 2021, you can give up to $15,000 to someone in a year. In 2022, this will increase to $16,000, and generally not have to deal with the IRS about it
- If you gift more than $15,000 in cash or property ( stocks, land, a new car) in a year to any individual, you need to file a gift tax return. This doesn't mean you have to pay a gift tax, you need to file IRS Form 709 to disclose the gift.
- The annual exclusion also is per person, meaning that if you're married, you and your spouse could give away a combined $32,000 a year to whomever without having to file a gift tax return.
- The annual exclusion is per individual; it isn't the total of all your gifts. For example, you can give $16,000 to your sister, another $16,000 to your best friend, another $16,000 to a neighbor, and so on all in the same year without having to file a gift tax return.
- Giving to nonprofits are charitable donations, not gifts.
Gift Tax Limit: Lifetime
Most taxpayers won't pay the tax because the IRS allows individuals to gift up to $12.06 million over thier lifetime without having to pay. $12.06 million is the lifetime gift tax exemption, and it's up from $11.7 million in 2021.
- For example, if you give your sister $50,000 this year, you'll use up your $16,000 annual exclusion. You'll need to file a gift tax return, but you probably won't pay a gift tax. Why? Because the extra $34,000 ($50,000 - $16,000) simply counts against your lifetime exclusion. Next year, if you give your sister another $50,000, the same thing occurs: you use up your annual exclusion and chip away another portion of your lifetime exclusion.
- The gift tax return keeps track of that lifetime exemption. So if you don't gift anything during your life, you have your whole lifetime exemption to use against your estate when you die.
The table below breaks down the example:
| Example of Lifetime Exemption Limits | |||||
| Gift Value | $216,000 | ||||
| 2022 Gift Tax Exemption Limit | $16,000 | ||||
| Taxable Amount | $200,000 | ||||
| Lifetime Gift Tax Exemption Limit | $12,060,000 | ||||
| Remaining Lifetime Exemption Limit | $11,860,000 | ||||
Most taxpayers will not reach the lifetime gift tax limit of $12.06 million. However, the lifetime gift tax exemption becomes essential again when you die and pass on an estate.
How to Calculate the Gift Tax
ike federal income tax, the gift tax is based on marginal tax brackets with rates between 18% and 40%. To calculate the taxable income for gifts exceeding the annual exclusion limit, the table below depicts what you will have to pay based on the value of the gift.
| 2022 Gift Tax Rates | |||||||||
| Gift Value Above the Annual Exclusion Limit | Rate | ||||||||
| Up to $10,000 | 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 $1,000,000 | 39% | ||||||||
| More than $1,000,000 | 40% | ||||||||
What Gifts Are Safe From Tax?
Gifts that can be taxed can include money, checks, property, and even interest-free loans. It also includes anything you sell below fair market value. For example, if you sell your home to your non-dependent child for $75,000 when it's worth $175250,000, the $100,000 difference could be considered a gift. The difference surpasses the annual gift tax limit and is deducted from your lifetime gift tax limit.
You can give unlimited gifts in these categories without facing a gift tax or having to file gift tax paperwork:
- Anything given to a spouse who is a U.S. citizen
- Anything given to a dependent
- Charitable donations
- Political donations
- Funds paid directly to educational institutions on behalf of someone else
- Funds are paid directly to medical services or health insurance providers on behalf of someone else
It's important to note that charitable donations are not only exempt from gift tax, but they may also be eligible to be an itemized deduction on your individual tax return.
Filing Your Gift Tax Return
Your first step to paying gift tax is reporting your gift by completing the IRS Form 709, United States Gift Tax Return, on or before your tax filing deadline.
Completing Form 709 is important anytime you gift more than $156,000 – even if you're within the $12.06 million lifetime limit. You'll need to file a Form 709 each year you give a reportable gift.
Can you afford to gift?
Gifting is a handy estate planning tool. However, please don't do it unless you can afford to give up the assets. If gifting jeopardizes your financial security, proceed carefully. Do not impoverish yourself to get a farming heir started in farming. Do not do it if gifting violates your business transition and estate planning goals.
Bottom Line
The gift tax is a federal tax on transferring cash or assets to another individual when equal value is not received in return.
To understand the ins and outs of the federal gift tax can be necessary for the generous and wealthy, but most Americans will never face this tax.
