It seems Uncle Sam can manage to take a cut of everything these days, but hold up: Do you really have to pay taxes on gifts you give folks? Yes, you most definitely do. It’s called—get this—a gift tax, but thankfully there’s a limit to how much tax you’ll have to pay on any financial gifts you give people.
So don’t worry—you don’t have to put your generosity on hold.
What Is the 2023 Gift Tax Limit?
The gift tax limit (or annual gift tax exclusion) for 2023 is $17,000 per recipient.1 You’ll have to report any gifts you give above that amount to the IRS on your tax return in 2024 (using Form 709). There are some exceptions to the rule, but I’ll get to those in a bit.
So what does that mean, really? Here’s the deal: If you had the money, you could make it rain dollars bills and give $17,000 to your mama, your brother, your auntie and your friends (you’ll have lots of new friends if you start giving away money) without paying taxes on those gifts. But toss any of them another buck throughout the year, and you’ll have more paperwork to do at tax time.
So no, you won’t be taxed on that $100 bill you slipped into your teenage son’s birthday card. Or the $650 washing machine you bought for a friend whose washer broke. You can actually do a whole lot of giving before setting off the tax man’s Spidey-sense.
What Is the Gift Tax Rate?
If you manage to use up all of your annual and lifetime gift tax exclusions (more on that in a minute), you’ll 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.2 That’s definitely not chump change!
Since gift tax rates can change—and change often—always work with a tax pro so you’ve got the most up-to-date information.
Now, let’s take a closer look at what else you need to know about gifts and taxes so you’re ready to roll when you’re out there living and giving like no one else.
What Is Considered a Gift?
Well, first things first. Before getting into the more nitty-gritty parts of the 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 phone. It could be the stack of cash you spent on your daughter’s wedding. Or that car Granddad bought Junior for his high school graduation.
As a matter of fact, 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.3 And anything you give as a gift could have Uncle Sam calling first dibs. Well, shoot!
Taxable Gift Examples
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 banking relationship by playing with loans!) If you choose to bless your friend with $5,000, that’s a gift too (and a much better choice). What about forgiving a loan from way back when? Gift.
Other kinds of taxable gifts include real estate, securities (think stocks and bonds), and personal property, like artwork.
Who Pays the Gift Tax?
If you give someone a gift that’s more than the annual gift exclusion limit ($17,000 in 2023), you’ll be responsible for reporting the gift on your tax return and (potentially) paying the gift tax. In some situations, you can make arrangements for the recipient to pay the tax instead, but that’s pretty rare—and outta pocket if you ask me.
What Can Be Excluded From Gifts?
The government lets a few things slide without taking its cut. These types of gifts are not considered taxable:4
- Gifts to individuals that don’t go over the annual exclusion for the calendar year ($17,000 as of 2023)
- School tuition or medical expenses you pay for someone else (as long as those payments go directly to the school or medical institution and not to an individual)
- Gifts to your spouse in any amount if they’re a U.S. citizen (if they’re not a citizen, the annual exclusion limit is $175,000)5
- Gifts to a political organization
Are Gifts Tax Deductible?
It’s also important to note that only certain types of gifts can be deducted from your taxable income—usually only gifts donated to a qualifying charity, called charitable donations.
How to Avoid the Gift Tax
The two big ways to avoid paying the gift tax are the annual gift tax exclusion and the lifetime gift tax exemption. For most of y’all, these exclusions are more than enough to make sure you’re not taxed for being generous.
Annual Gift Tax Exclusion
Like I mentioned before, the annual exclusion limit (the cap on tax-free gifts) is $17,000 per person per year for 2023. So even if you do give like crazy, you won’t have to file a gift tax return unless you go over that limit.
Don’t settle for tax software with hidden fees or agendas. Use one that’s on your side—Ramsey SmartTax.
If you give more than $17,000 to one person in a calendar year, that’s when stuff gets complicated.
How the Annual Gift Tax Exclusion Works
Let’s say you want to help your daughter buy her first home, so you cut her a $34,000 check. To figure out how much is taxable, you’d subtract the annual $17,000 exclusion from the total. In this case, the leftover $17,000 is taxable. So, while you would have to file a gift tax return, you’d only be responsible for taxes on $17,000 of the $34,000—or you can apply it to your lifetime gift exemption.
Gift Splitting Between Spouses
If you’re married, each spouse is entitled to the $17,000 exclusion. So, looking at the same example, you and your spouse could each give your daughter $17,000 for a total of $34,000 without going over the annual limit. This is often called gift splitting.
Lifetime Gift Tax Exemption
Another way to skirt around the gift tax is the lifetime gift tax exemption. This is the total amount—$12.92 million as of 2023—you’re able to give away tax-free over the course of your lifetime above the annual gift tax exclusion. The exemption is doubled to $25.84 million for married couples.6
And just a quick heads up: The tax reform law of 2018 doubled the lifetime exemption through 2025, but in 2026, it’s set to return to pre-2018 levels of around $5.5 million.7
Lifetime Gift Tax Exemption and the Estate Tax
The lifetime gift tax exemption is shared with the estate tax, which means the more money you give above the annual gift exclusion, the less money you’ll be able to leave to your heirs tax-free when you die. But $12.92–25.84 million is such a big threshold that most of us will never reach it. And if your estate does hit $13 million—you’re killing it!
How the Lifetime Gift Tax Exemption Works
Think back to our first example: You want to give your daughter $34,000 for a house. The first $17,000 would be free and clear of taxes. For the remaining $17,000, 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 exemption. In this case, you’d simply subtract $17,000 from your lifetime cap of $12.92 million, leaving you about $12.9 million to work with. Say less.
So, what’s the point of filing a gift tax return if you can exclude the gift tax? It’s just a way for the IRS to keep track of your lifetime exemption limit. The more you knock off your lifetime exemption, 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, then it might make sense to go ahead and pay taxes on gifts now so 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.
Get Your Taxes Done Right
Taxes may complicate your gift giving a little, but there’s nothing like the feeling of giving a gift to someone who will appreciate it! Generous people are also happier and more content. When you bless others, you also bless yourself. You have to keep taxes in mind when giving, but don’t let that distract you from the happiness of giving.
I know taxes can be tricky and confusing. Hey, tax pros exist for a reason! If you have a relatively simple return and want to use trustworthy, budget-friendly tax software to file your taxes, check out Ramsey SmartTax.
If you’re unsure about what to do with your gifts—or any other tax situation—get in touch with a RamseyTrusted tax pro to make sure all your bases are covered and knock out that confusion. These tax pros take the time to get to know you and your financial situation so they can help you file your taxes with confidence.
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About the author
Jade Warshaw