Gift Tax rules for US citizens

Published on October 9, 2023
by Tyron Recedes, EA, CPA

Tyron Recedes, an IRS Enrolled Agent and CPA with 12 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working in the UAE and Australia.

Basics of Gift Tax

If you’re contemplating the idea of sharing some of your financial assets or property, it’s crucial to be aware of the tax rules that come into play. We’re talking about the gift tax here. What exactly is it and why is it important?

Gift tax is a federal levy that kicks in when you give money or assets to someone without getting something of equal worth in return. The Internal Revenue Service (IRS) enforces this tax to prevent individuals from sidestepping estate taxes by dispersing their assets before their death. So, if you’re planning to give away a significant amount, the IRS will want to be in the loop.

You might ask, “Is this something I need to be concerned about?” Well, it depends. Small gifts usually don’t trigger any tax worries. But if you’re thinking about making larger gifts that go beyond the yearly gift tax exclusion, then you definitely need to understand the tax rules.

Exclusions, Limits, and Special Cases

Not every transfer of money or property is classified as a gift in the eyes of the IRS. For example, if you cover someone’s medical expenses directly, that’s not considered a gift. The same goes for contributions to charitable entities. However, if you’re giving away cash, securities, or perhaps a vacation home to a relative, those are classified as gifts and may be subject to the gift tax.

So, what’s this yearly gift tax exclusion all about? It’s a set amount you can give to each person within a year without the need to report it to the IRS. For the year 2023, this limit is set at $17,000. If your gift exceeds this amount, you’ll need to complete IRS Form 709, which is the official document for reporting gifts and generation-skipping transfers.

But that’s not the end of the story. There’s also what’s known as a lifetime gift tax exemption. This is the cumulative amount you can give away over your entire life without incurring the gift tax. As of 2023, this limit is an impressive $12.92 million. Keep in mind, though, that using this exemption will reduce what’s available for your estate tax exemption when you’re no longer around.

Are there any gifts that don’t attract gift tax at all? Indeed, there are. Here’s a rundown of gifts that are typically not subject to gift tax:

  • Gifts to spouses
  • Contributions to political entities
  • Direct payments for educational expenses
  • Direct payments for medical costs

At the end of the day, navigating the complexities of gift tax can be challenging. It’s often a good idea to consult with a tax professional to ensure you’re in full compliance with the law and making the most of the available exemptions and exclusions.

Filing IRS Form 709

If the value of your gifts surpasses the yearly exclusion limit, you’ll be required to complete IRS Form 709. This form is distinct from your annual income tax return and has a deadline of April 15 in the year after you made the gift. If that date falls on a weekend, the deadline shifts to the next working day. While the form may seem daunting, it’s mostly straightforward. You’ll need to provide information about the gift, its monetary worth, and who received it. If you find IRS paperwork intimidating, professional assistance might be beneficial.

On the topic of expert advice, consulting a tax advisor can be invaluable, especially if you’re dealing with significant gifts or want to ensure you’re following all the rules. A tax advisor can clarify the intricacies of gift tax regulations, assist in formulating your gift-giving strategy, and help you avoid expensive errors.

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Strategic Gift-Giving

If you’re in a marital partnership, you might wonder if both of you can collaborate to give a more substantial gift without incurring taxes. The answer is yes, through a method known as gift splitting. Each partner can give up to $17,000 to the same individual, totaling $34,000, without triggering any gift tax. However, both partners must consent to divide the gift, and each will need to submit a separate gift tax form to report it.

As for the tax rates applicable to gifts, they can vary between 18% and 40%, based on the gift’s size. Importantly, you won’t be liable for any gift tax until your lifetime gifts exceed $12.92 million. Therefore, unless you intend to be exceptionally generous, you’re probably safe from any immediate tax liability.

Charitable Giving and Its Impact on Estate Tax

Great news for the altruistic: donations to IRS-recognized charitable entities are generally not subject to gift tax. So, feel free to contribute to causes that resonate with you, but ensure the charity has IRS approval.

Switching gears to a more complicated topic: the connection between gift and estate taxes. Have you ever wondered how the gifts you make during your lifetime could impact your estate later on? The lifetime exemption for both gift and estate taxes is unified. In other words, the gifts you make now will diminish this exemption for the future.

Avoiding Common Mistakes and Penalties

Be aware, the IRS has an extensive reach and a keen sense of memory. Failure to report a gift can result in a financial penalty, calculated as a fraction of the gift’s value. And don’t assume that residing overseas will protect you; the U.S. has tax agreements with multiple countries, facilitating the exchange of financial data between governments.

Additionally, here’s something you might not have thought about: gifts that are designated for future use, known as gifts of future interests. These gifts are not immediately accessible to the recipient and are indeed subject to gift tax. Moreover, they are not eligible for the annual gift tax exclusion.

When to Consult a Tax Advisor for Gift Tax Planning

So, when is the right time to seek expert advice on gift tax planning? The moment you recognize that your gifts could carry tax consequences is when you should consult a professional. This is especially crucial if you’re dealing with substantial amounts or assets such as property or stock options. A tax specialist can help you navigate IRS guidelines and forms, ensuring you’re not only following the rules but also capitalizing on any opportunities to minimize your tax burden.

Have you ever thought about the possibility of sharing gifts with your spouse to lessen your tax obligations? Or perhaps you’re interested in maximizing the benefits of the annual gift tax exclusion. These are the types of inquiries a tax professional can clarify for you.

To sum it up, the act of giving gifts can bring immense joy, but it also comes with its own set of tax considerations that shouldn’t be overlooked. When it comes to interactions with the IRS, having a knowledgeable professional on your side is always a smart move.


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