It seems Uncle Sam can manage to take a cut of everything these days, but does the government really tax gifts? Yep (cue the eye roll). But don’t worry—there’s no need to put your generosity on hold.
You won’t be taxed on that $100 bill you slipped into your teenage son’s birthday card. (The cash he pocketed after speed-reading your heartfelt note.) Or the $650 washing machine you bought for a friend in need. In fact, you can do a whole lot of giving before you’ll have to pay taxes on your gifts.
The gift tax exclusion for 2022 is $16,000 per recipient.1 That means if you had the money, you could whip out your checkbook and write $16,000 checks to your mom, your brother, your sister, your new best friends (you’ll have lots of “friends” if you start giving away free money), and you wouldn’t have to pay a gift tax.
Any gift above the exclusion is subject to taxes, but there are exceptions to that rule we’ll talk about a little later.
Taxes shouldn’t be this complicated. Connect with a RamseyTrusted tax advisor.
So let’s take a closer look at what you need to know when it comes to gifts and taxes so you’re ready to roll when you’re out there living and giving like no one else.
What’s Considered a Gift?
Well, first thing’s first. Before getting into the nitty-gritty of tax code, let’s look at what a gift is. It’s not just the stack of cash you gave your son to help him buy a bike. It could be the stack of cash you spent on your daughter’s wedding. Or that car Grandpa bought Junior for his high school graduation.
Basically, any asset—think cash or property—that you give to someone directly or indirectly without getting something of equal value (aka fair market value) in return is considered a gift, according to the IRS. That’s right. Anything someone gives you as a gift could potentially have Uncle Sam calling first dibs.
For example, if you loan a friend $5,000 without charging interest, the government says that’s a gift. (It’s also a bad idea—you don’t want to turn your friendship into a bank relationship by playing with loans!) What about forgiving a loan from way back when? Gift. Blessing a friend with cash to help them get through a hard time. Yep, that’s a gift too.
If you give someone a gift that’s higher than the $16,000 gift exclusion limit, you’ll be responsible for paying the gift tax. In some circumstances, you could make special arrangements for the recipient to pay the tax instead, but that’s pretty rare.
Annual Gift Exclusion
Like we’ve mentioned before, the annual exclusion limit (the cap on tax-free gifts) is a whopping $16,000 per person per year for 2022 (it’s $15,000 for gifts made in 20212). So even if you do give outrageously, you wouldn’t have to file a gift tax return unless you went over those limits.
It’s when you give more than $16,000 to one person in a calendar year that this dance gets a little more complicated.
Let’s say you want to help your daughter buy her first home, so you cut her a $32,000 check. To figure out how much is taxable, you’d subtract the annual $16,000 exclusion from the total. In this case, the remaining $16,000 is taxable. So, while you would have to file a gift tax return, you would only be responsible for taxes on $16,000 of the $32,000—or you can apply it to your lifetime gift exclusion (more on that in a minute).
And as an added bonus if you’re married, each spouse is entitled to the $16,000 exclusion. So looking at the same example, you and your spouse could each give your daughter $16,000 for a total of $32,000 without going over the annual limit.
Lifetime Gift Exclusion
Another way to dance around the gift tax is the lifetime gift tax exclusion. This is the total amount—$12.06 million for 2022—you’re able to give away tax-free over the course of your lifetime above the annual gift tax exclusion.3 The exclusion is doubled to $24.12 million for married couples.
The lifetime gift tax exclusion is shared with the estate tax, which means the more money you give above the annual gift exclusion, the less money you will be able to leave to your heirs tax-free when you die. But $12.06 million is such a big threshold that most of us will never reach it.
Think back to our first example: You want to give your daughter $32,000 for a house. The first $16,000 would be free and clear of taxes. For the remaining $16,000, you’ll have to file a gift tax return—but you don’t have to pay taxes on that extra money. You can choose to apply that amount to your lifetime exclusion. In this case, you would simply subtract $16,000 from your lifetime cap of $12.06 million, leaving you $12.044 million to work with.
So why the tax return if you can just exclude the gift tax? It’s simply a way for the IRS to keep track of your lifetime exclusion limit. The more you have knocked off your lifetime exclusion, the less you’ll have left over to protect your estate from getting hit with taxes down the road. If you think your estate will blow past that lifetime cap—if so, good for you!—then it might make sense to go ahead and pay taxes on gifts now so that you can protect your estate later.
As wonderful as gifts are, they can still stir up some confusion, so be sure to work with a tax pro. That way, you can have peace of mind knowing there’s someone in your corner to help make sure you’re making the right calls for your situation.
What Is the Gift Tax Rate in 2021?
If you manage to use up all of your exclusions, you may indeed have to pay the gift tax. If that’s the case for you, buckle up—the actual gift tax rate can vary between 18% and 40% depending on the amount you’re giving.4 That’s certainly not chump change!
And just a quick warning: The tax reform law of 2018 doubled the lifetime exclusion through 2025, but in 2026, it’s set to return to pre-2018 levels of around $5 million.5
It’s important to remember that gift tax rates can change—and change often—so always be sure you’re working with a tax pro so you’ve got the most up-to-date information.
What Can Be Excluded From Gifts?
While most gifts are technically taxable, there are a few exceptions to the rule. Generally, the types of gifts that would not be considered taxable include:
- Gifts to individuals that don’t go over the annual exclusion for the calendar year ($16,000 as of 2022).
- School tuition or medical expenses you pay for someone (as long as those payments go directly to the educational and medical institutions and not to an individual).
- Gifts to your spouse in any amount if they are a U.S. citizen. If they’re not a citizen, the annual exclusion limit is $164,000 for 2022.6
- Gifts to a political organization.
While we’re talking gifts, it’s important to note that only certain types of gifts can be deducted from your taxable income—usually those are gifts donated to a qualifying charity, called charitable donations.
Get Your Taxes Done Right
Taxes may complicate your gift-giving a little but remember: There’s nothing like the feeling of giving a gift to someone who needs it! Generous people also are happier and more content people. When you bless others, you also bless yourself. There are a few tax considerations to keep in mind when giving, but don’t let that freak you out!
We know taxes can be tricky and confusing. If you have a relatively simple return and want to use trustworthy, budget-friendly tax software, check out Ramsey SmartTax.
If you’re feeling uncertain about what to do with your gifts—or any other tax situation—we’ve got your back. Get in touch with a tax Endorsed Local Provider (ELP) to make sure all your bases are covered and eliminate the uncertainty. ELPs are RamseyTrusted and take the time to get to know you and your financial situation so they can help you file your taxes with confidence!