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Understanding the Gift Tax: A Comprehensive Guide
The gift tax is a federal tax imposed on certain assets transferred from one person to another. However, most taxpayers will never have to worry about paying the gift tax, which comes due only when you make more than $13.61 million in gifts over your lifetime. Here’s everything you need to know.
What Is the Gift Tax?
The gift tax is a tax on the transfer of property from one person to another without the donor receiving anything—or less than the full value of the gift—in return. That can include things like cash, investments, real estate, art, and more.
The IRS considers any such transfer as a gift even if the donor didn’t intend it to be one. The only exceptions to the list include:
- Charitable gifts: You don’t need to be concerned about gifts made to a charitable organization. In fact, the IRS allows taxpayers to deduct certain charitable contributions on their tax returns.
- Spousal gifts: If your spouse is a U.S. citizen, you generally don’t need to report any gifts made to them. If they’re a foreign citizen, you can gift up to $185,000 in 2024 without it counting against you.
- Educational expense gifts: If you paid tuition directly to an eligible educational institution, it does not count as a gift. However, the exception doesn’t apply to other educational costs, such as books, supplies, and room and board. It also doesn’t include contributions to a 529 plan.
- Medical expense gifts: You don’t have to include gifts made in the form of medical expenses paid directly to a health care provider on behalf of someone else. It doesn’t apply, however, if the gift was reimbursed by the recipient’s health insurance plan.
How Much Can You Gift Tax-Free?
The IRS sets both annual and lifetime exemptions for the gift tax, and the way it works makes it unlikely for most taxpayers to ever have to worry about paying it.
In 2024, the IRS allows individuals to provide gifts of up to $18,000 per individual. If you’re married and filing a joint tax return, the threshold for both spouses is doubled to $36,000. However, exceeding that threshold doesn’t necessarily mean that you’ll be subject to the gift tax.
Instead, any amount above the $18,000 exclusion limit simply reduces your lifetime exemption amount, which is a staggering $13.61 million in 2024—note that this exemption applies to both gift and estate taxes.
For example, let’s say your child just graduated from college, and you decide to give them a car worth $20,000 as a present. The gift exceeds the annual exclusion limit by $2,000 and will reduce your lifetime limit by the same amount.
If you have a sizable net worth and exhaust the full lifetime exemption amount over the course of your life, any additional gifts will be subject to the gift tax.
How Much Is the Gift Tax Rate?
If you exceed the lifetime exemption threshold, additional gifts will be taxed based on the amount of the taxable gift:
| Taxable Amount | Marginal Tax Rate |
|---|---|
| $0 — $9,999 | 18% |
| $10,000 — $19,999 | 20% |
| $20,000 — $39,999 | 22% |
| $40,000 — $59,999 | 24% |
| $60,000 — $79,999 | 26% |
| $80,000 — $99,999 | 28% |
| $100,000 — $149,999 | 30% |
| $150,000 — $249,999 | 32% |
| $250,000 — $499,999 | 34% |
| $500,000 — $749,999 | 37% |
| $750,000 — $999,999 | 39% |
| $1 million and up | 40% |
How to Avoid the Gift Tax
Due to the exclusions and exemptions associated with the gift tax, it’s unlikely that most Americans will ever run into it. However, if you want to cover all your bases, here are some steps you can take to avoid having to deal with it at all:
- Stay under the annual exclusion limit: The annual exclusion limit, which is $18,000 for the 2024 tax year, is adjusted regularly. Each year, make sure you know what the exclusion amount is and be sure to keep your gifts below that amount.
- Split the gift: If you’re married and file a joint return, you can make a gift to another individual of up to $36,000 in 2024, as long as your spouse agrees not to give that person a gift during the same year. Keep in mind, though, that you’ll need to report the gift and have your spouse show that they agreed to the gift.
- Make a gift that’s eligible for exclusion: Remember that charitable donations, most spousal gifts, tuition gifts paid directly to the school, and unreimbursed medical gifts paid directly to a health care provider are all exempted from the gift tax.
There are other, more complex ways to avoid the gift tax, but if you’re looking for more options, it’s best to consult with a tax professional.
Do You Pay Taxes When You Receive a Gift?
Generally, no, you don’t pay gift taxes when you receive a gift. However, certain gifts may be subject to other taxes.
For example, if you receive a stock or other investment or even property as a gift, you may be subject to taxes when you sell the asset. Consult with a tax professional to learn more about how taxes are calculated in those instances.
The Bottom Line
The gift tax is a complex provision of the tax code, but in most cases, taxpayers don’t have to worry about it.
If you do have a high net worth, however, and you’re concerned about running into the gift tax, it’s important to consult with a tax professional and an estate planning professional to ensure that you properly transfer your assets to your loved ones without creating an unnecessary tax bill.
Contact O1ne Mortgage for Your Mortgage Needs
At O1ne Mortgage, we understand the complexities of financial planning and are here to help you navigate through them. Whether you’re looking to buy a new home, refinance your existing mortgage, or need expert advice on managing your finances, our team is here to assist you.
Call us today at 213-732-3074 for any mortgage service needs. Our experienced loan officers are ready to provide you with personalized solutions that fit your unique financial situation.
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