If you’re considering giving property or money to a relative this year or in the future, you may be wondering whether you have to pay tax on that gift. There are a few gifting thresholds in place; generally speaking, if you don’t exceed the monetary values stipulated by the IRS for gifting to an individual, then you shouldn’t have much to worry about. But if your gift exceeds a certain value either on an individual basis or that surpasses the lifetime exemption, you’ll have to file a gift tax return and pay gift tax.
A history of the gift tax
Gift tax is the transfer tax that occurs when you transfer property or money to someone else without receiving something of equal value in return. Whether or not you intend for the transfer to be a gift – if you give a loan to a family member interest-free, for example – the IRS still views it as such, so you have to be mindful of the amounts you’re transferring to a friend or family member.
The gift tax was first introduced in 1924, before being briefly repealed and reintroduced in 1932, back when the lifetime gift tax limit was $50,000 and the annual exemption was $5,000 per recipient. It was meant to prevent the wealthy from avoiding estate taxes by simply passing down their wealth to family members.
Today, individuals can gift up to $16,000 tax free per recipient. The individual lifetime exemption is $12.06 million, and these amounts are always adjusted for inflation. For couples who wish to extend gifts together, those numbers may be combined at $32,000 as an individual gift per recipient and $24.12 million lifetime. (Keeping in mind, however, that unless current law changes, the lifetime gift exemption is set to revert to $5 million in 2026.)
Giving money or property as a gift in practice
There are many reasons to give money or property as a gift to a family member or friend: to help pay for education, assist with a property down payment, or simply help them through a rough financial time. As long as you give each individual recipient $16,000 or less, you do not have to file a tax return. If you happen to go over that annual amount for any recipient, you’d have to file a gift-tax return via Form 709.
For example, let’s say you wanted to gift your child or grandchild a $20,000 down payment for a house. You’d have to report this amount to the IRS, but you probably wouldn’t get taxed on the gift amount. Rather, that extra $4,000 would be subtracted from your lifetime amount. If you ever exceeded the lifetime gift amount, then you would be subject to tax rates varying between 18-40%.
As another example, instead of giving your child or grandchild money to make a down payment, perhaps you consider gifting a piece of real estate to them. The IRS requires you to figure out the adjusted cost basis before you make the gift, what the fair market value of the property is at the time of gifting, and consider any gift tax already paid on the property. Assuming that the value of the home does exceed the annual gift limit but does not exceed the lifetime amount, you’d just have to file paperwork. However, your child or grandchild may be subject to a future capital gains tax on any profit earned if they choose to sell the home at a later date.
What isn’t considered taxable as a gift?
According to the IRS, you can gift any amount without a tax penalty under the following circumstances:
- Educational or medical exclusions, meaning tuition or medical expenses you pay directly to the school or hospital on someone else’s behalf.
- Gifts between spouses – these do not have a limit.
Your options for money or property gifts
With some exceptions, you will have to file a gift tax return if you exceed your annual gift amount for an individual recipient, and you’ll be subject to paying taxes if you exceed your lifetime gift amount.
Whether you want to gift money or property to your loved ones, it’s best to discuss your options with your tax professional before making any significant moves to consider the best gifting strategies for you.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.