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What’s The Deal With Gift Tax?

When it comes to taxes, there's a lot to keep track of, especially for self-employed individuals. One area that often causes confusion is gift taxes. Maybe you're planning to give a generous gift, or perhaps you're on the receiving end—either way, understanding gift taxes is key. We'll take you through who pays gift tax, the gift tax limit 2023, gift tax limit 2024, the lifetime gift tax exemption and how much can you gift tax free.

Table of contents

Key Takeaways:...Read more

What is gift tax?...Read more

Who pays gift tax?...Read more

How much can you gift tax-free?...Read more

What is the annual gift tax exclusion for 2024?...Read more

What is the lifetime gift tax exemption?...Read more

What are the rules on gifting money to family?...Read more

Key Takeaways:

Gift tax is levied on gifts that are classified as taxable.
The gift limit for 2024 is $18,000 per recipient for single filers and $36,000 for married couples.
The current lifetime gift tax exemption is $13.61 million.

What is gift tax?

Gift tax is a federal tax that applies when you transfer money or property to someone without expecting anything of equal value in return, which is the basic gift definition. The person giving the gift is usually responsible for paying the gift tax, not the recipient. The IRS defines certain taxable gifts based on their value. For 2024, you can give up to $18,000 to each recipient without triggering the gift tax, which is known as the annual gift tax exemption. If your gift exceeds the annual exemption, it may be considered a taxable gift, and you might need to file a gift tax return. However, this doesn’t always mean you'll owe taxes, thanks to the lifetime gift tax exemption. The current lifetime exemption allows you to give away up to $13.61 million over your lifetime without paying gift taxes. Some gifts, like those to a spouse, charitable organizations or for medical expenses or education (paid directly to the institution), are typically not considered taxable gifts.

Infographic entitled Taxable Gifts listing gifts that are subject to taxation.

Who pays gift tax?

Generally, the donor—the person giving the gift—is responsible for paying the gift tax. The IRS defines a gift as any transfer of money or property where no equal value is received in return, which aligns with the gift definition. When the value of the gift surpasses the annual gift tax exemption limit, the donor must file a gift tax return. It's important to note that receiving a gift does not usually mean you'll face taxable gifts or have to report it as taxable income. However, any income generated from the gifted assets is taxable. There’s no federal inheritance tax, but some states do have their own inheritance taxes.

How much can you gift tax-free?

In 2024, you can give up to $18,000 per recipient without having to pay gift tax. This amount is known as the gift tax exemption for the year. For comparison, the gift tax limit 2023 was $17,000 per recipient. So if you have multiple children, you can give each child up to $18,000 in 2024 for a total of $54,000 without triggering the gift tax. For married couples filing jointly, the gift tax limit 2024 allows them to give up to $36,000 per recipient annually without incurring the gift tax. Any amount over this limit is considered a taxable gift and counts toward the lifetime exemption. For 2024, the lifetime exemption is $13.61 million. Even if your gift falls within the annual limit, you must report it by filing Form 709. This form should be attached to your annual tax return. Gift tax rates can range from 18% to 40% based on the size of the taxable gift. If the value of the gift isn't immediately clear, you should use the fair market value (FMV) of the asset to determine the tax liability.

Infographic entitled Gift Tax Rates for gifts that cross the 2024 gift tax exclusion.

What is the annual gift tax exclusion for 2024?

You can give up to $18,000 to each person without having to worry about the gift tax—that's the annual gift tax exclusion 2024. This means you can hand out $18,000 to your cousin, another $18,000 to a friend, and so on, all without needing to report it to the IRS. If you give more than $18,000 to one person in a year, you'll need to fill out IRS Form 709 to report the extra amount. Don't worry, you won't automatically owe gift tax; it just means you need to let the IRS know about the gift that goes beyond the annual gift tax exclusion 2024. For married couples, the rules are even better. Both you and your spouse can each give $18,000 to the same person, adding up to $36,000 total, without having to file a gift tax return. This is called "gift splitting," and it’s a handy way to make larger gifts without the tax hassle. Gifts between spouses are generally unlimited and don’t usually require a gift tax return, though there are special rules if your spouse isn’t a US citizen. And remember, gifts to qualified nonprofits are considered charitable donations, so they don’t count against your gift tax exemption.

What is the lifetime gift tax exemption?

The lifetime gift tax exemption for 2024 is $13.61 million, an increase from $12.92 million in 2023. This means you can give up to $13.61 million over your lifetime without paying gift tax. For married couples, the exemption is doubled to $27.22 million, allowing them to give more without incurring taxes. Say you want to support your children financially. You give $18,000 to each of your two children in 2024. This would have triggered a tax return with the 2023 gift tax exclusion, but as the 2024 limit is $18,000, you don't need to file a gift tax return for these gifts. However, if you also give $500,000 to your daughter for a house down payment, the $482,000 that exceeds the annual exclusion ($500,000 - $18,000) will count against her lifetime gift tax exemption of $13.61 million. If you have previously used $2 million of your exemption, this additional $482,000 will reduce your remaining exemption to $11.13 million. A 40% tax also applies if you give a large gift to someone who is 37½ years younger than you. This limit is tied to the lifetime exclusion. Keep in mind that the gift tax exemption is set to revert to around $5 million per individual in 2026, so it’s important to track how much of your exemption you’ve used. If you don’t use your lifetime exemption, it can be applied to your estate, helping reduce the tax burden on your heirs.

Infographic entitled Gift Limit 2024 & 2023 showing the 2024 gift tax exclusion and 2023 gift tax exclusion.

What are the rules on gifting money to family?

When it comes to the rules on gifting money to family, here’s what you need to know. In 2024, you can give up to $18,000 to each person in your family without worrying about gift tax. This amount is called the 2024 gift tax exclusion. So if you give $18,000 to your child and another $18,000 to your sibling, you’re within the limit and don’t need to file any extra paperwork. If you give more than $18,000 to one person in a year, that extra amount is considered a taxable gift. For example, if you give $25,000 to your niece, the $7,000 over the annual limit must be reported on Form 709. However, you may not owe any tax immediately if you’re still within your gift tax exemption. The gift tax exemption for 2024 is $13.61 million. This means you can give away up to $13.61 million over your lifetime without paying gift tax. For married couples, this exemption doubles to $27.22 million. If you and your spouse give $30,000 to your grandchild, the $12,000 over the annual limit will count against your lifetime exemption. Once you exceed the exemption, you’ll need to pay gift tax on the excess. Additionally, payments made directly to schools or medical providers on behalf of someone else don’t count toward the annual or lifetime limits. For example, paying $10,000 directly to a college for your child’s tuition doesn’t affect your gift limits. While the gift limit 2024 doesn’t affect self-employment tax, they can get complicated, as tax laws are always changing. Getting help from FlyFin can simplify your taxes and get you tax planning advice and strategies from expert CPAs who offer unlimited support on the app.

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