It’s important to know gift limitations and the tax treatment of gifts ahead of the holiday season. Before you give, and receive, it’s a good idea to plan ahead so you’re not in trouble with the IRS come tax time.
What Does the IRS Consider a Gift?
Any transfer to an individual, either directly or indirectly, where full consideration (meaning money or money’s worth) is not received in return.
Which Gifts Can Be Taxed?
The general rule of thumb is that any gift is a taxable gift — but there are many exceptions. The following gifts are generally not taxable:
- Gifts that do not exceed the annual exclusion for the calendar year.
- Tuition or medical expenses you pay for someone (the educational and medical exclusions).
- Gifts to your spouse.
- Gifts to a political organization for its use.
In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.
Who Pays the Taxes on Gifts?
One important note: the donor — meaning the one giving the gift — is generally responsible for paying the gift tax.
The annual exclusion applies to gifts, however. For 2022, the annual exclusion is $16,000. It will increase to $17,000 in 2023. This exclusion applies to each gift, meaning you could technically give several gifts right under the allowable limit before needing to report to the IRS. For couples, each person is allowed the exclusion, meaning that if a married couple wants to give their child a gift, the limit is $32,000 between both parties.
How the Gift Tax Affects You
Making a gift does not necessarily affect your federal income tax. You cannot deduct the value of gifts you give (unless they are deductible charitable contributions). The gift tax is the tax on the transfer of property, which means the tax applies whether or not the donor intends the transfer to be a gift or not.
This applies to any transfer of property. You make a gift if you give property without expecting to receive something of equal value in return. The IRS states that if you sell something at less than its full value — or if you make an interest-free or reduced-interest loan — you may be making a gift.
If you think you might be subject to a gift tax this holiday season, see Form 709 and its instructions on the IRS website.
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