When your (very) generous Aunt Betty slips you a $5,000 check on your birthday, do you have to pay taxes on her cash gift?
And when you send an annual donation to your favorite charity or alma mater, does anyone pay taxes on that gift?
The answer in both cases is no, although, as silly as it may sound, donors must pay gift taxes a little present.
Fortunately, recipients never pay tax on gifts, and the limits under which gift tax comes into play for givers are high enough that most people never pay tax on their gifts. But as your wealth grows over time, the gift tax can start to take its toll on you.
What is a gift tax?
A gift is when someone gives something of value (money, property, use of property, etc.) to someone else without expecting anything in return. Also, if you were to sell something you own for significantly less than its fair market value—the price it would normally be sold to a stranger—then it could be treated as a gift by the IRS.
For example, if you own a $15,000 car and want to sell it to your brother for $10,000 as a favor, the $5,000 difference could be considered a gift by the taxman.
Who pays gift tax?
The donor is usually responsible for paying tax on the gift. But the tax only applies to those who exceed the annual gift limit *and* the lifetime limit (see “Gift Tax Limit 2022” and “Gift Tax Exemption 2022” below).
It is important to note that support from your parents or guardians, although they may still claim you as a dependent, is not No constitute a taxable gift. Your parents can give you all the money in the world as long as they require you to pay taxes, and it will never be taxed as a gift. However, once you lose the right to dependency, their support may be taxed as a gift.
Gifts between spouses are also exempt from gift tax.
Gift Tax Limit 2022
Before you start counting every penny you gave your niece, don’t worry about it. Most gifts to friends and family do not exceed the yearly threshold for taxable gifts.
In the 2022 tax year, a taxpayer can donate up to $16,000 per recipient per year without being taxed on the gift(s).. For example, this year you can give friend A $15,000, friend B $15,000, and your sister $15,000 and your gifts will not be taxed.
However, if you gave your sister $15,000 at the start of the year and then another $2,000 later that year, your gifts could you will then be taxed based on how much of your lifetime estate and gift tax exemption you have spent.
Lifetime gift tax exemption 2022
In addition to the annual gift tax limit per recipient, as of 2022, the IRS also allows you to give up to $12.06 million over a lifetime without having to pay. Any gift tax. This restriction also applies to property taxes.
How does the lifetime gift tax exemption work? Let’s look at the previous example where you gave your sister $17,000. This has exceeded the $16,000 annual limit, so you will need to file a gift tax return with the IRS. But you don’t actually have to pay gift tax because the $1,000 you’ve exceeded the annual limit is far, far below yours. life expectancy limit where you still have $12.059 million of tax-free gifts to go through.
So, as you can see, unless you’re regularly throwing five-figure gifts around — and you’ve been for a long time — you probably don’t need to worry about paying gift tax.
If one day you exceed the annual limit of 16,000 USD as well as lifetime cap, your tax rate will range from 18% to 40%.
How to avoid gift tax
The best way to avoid the gift tax, or rather not eat up your lifetime limit on tax-free gifts, is pretty obvious: Not give gifts worth more than $16,000 per recipient per year.
But if passing the $16K annual mark is unavoidable for some reason, there are other strategies you can use to (legally) avoid filing a gift tax return with the IRS.
Gift sharing
We are all eligible for an individual annual discount of $16,000 per gift recipient. This means that your mother and father can each give you $15,000 this year—$30,000 in total—without tax on that gift. This is called “gift sharing”.
Gradual donation
Although inheritance tax (taxing a person’s assets after their death) is a completely different subject, it is well related to gift tax given that the lifetime exemption applies to both gifts and property transfers. Many people who want to avoid high inheritance taxes after death choose to gradually give away their property and money as gifts as they grow older.
Give a gift that “doesn’t count”
Fortunately, the IRS understands that some gifts benefit society as a whole, not just the recipient, so a number of gifts are excluded from the gift tax entirely. There are unlimited exemptions (they are never taxed) for the following gifts:
- Charity gifts.
- Gifts to political organizations.
- Educational and medical gifts (see explanation below).
To receive a gift tax exemption for educational and medical gifts, you must give the gift directly to the medical or educational institution.
For example, if your aunt is having an operation that will cost $50,000 and you want to give your aunt money for the operation, you must donate $50,000 directly to the hospital. You can’t give this money to your aunt or you’ll be subject to gift tax on more than $16,000. The same rule applies to educational gifts (for example, if your friend or family member is in college).
Also, note that charitable donations may be claimed as an itemized deduction on your individual income tax return.
Read more: Itemized Deductions: A Beginner’s Guide
Frequently asked Questions
How much is the car donation tax?
Gift tax applies to donated vehicles just like any other gift. If the car’s value is over $16,000 and the donor has passed the $12.06 million lifetime exemption, the car will be taxed at a rate of 18% to 40%.
How much is the house donation tax?
Donated homes will, of course, exceed the annual maximum gift value of $16,000. If the donor has already exhausted their lifetime gift exemption of $12.06 million, the house they donate to someone will be taxed up to 40%.
Do I pay tax on money donated by my parents?
As a general rule, you do not need to pay tax on money given by your parents, as gift tax usually applies to the giver of the gift, not the recipient.
And if your parents still consider you dependent on your taxes, They you don’t have to pay tax on any gifts they give you, no matter how big.
If your parents do not claim that you are a dependent, their gifts to you will be subject to an annual and lifetime gift maximum before being taxed.
Summary
In general, the gift tax does not affect very many people in their 20s and 20s. So don’t worry about that $20 you gave your brother for his last birthday. It will not be taxed (under current tax laws, anyway).
The same is true if you receive a larger gift from a generous relative… as long as it doesn’t exceed $16,000 a year. Gift tax can easily be avoided throughout life simply by following certain limits set by the government.
Now that you have all the gift tax facts, don’t be afraid to be generous this year!