Gift Tax Rules

Gift tax is tax you owe the IRS when the value of what you give to an individual exceeds a specific threshold during a calendar year. This threshold is the gift tax exclusion, discussed below. Gift tax applies whether you give cash or property.

The purpose of gift taxes is to prevent people from avoiding estate taxes by giving their wealth away while still alive. Gift and estate taxes are meant to generate revenue and to maintain equity in the Federal tax system, since wealthy people – who might not receive much in the way of taxable income – might not have to pay much in income tax.

Not all taxable gifts are subject to gift tax, including

• Deductible charitable donations
• Gifts to a spouse who is a US citizen
• Gifts to a non-citizen spouse below a specific threshold, $175,000 in 2023, $185,000 in 2024

Gifts to a non-spouse are not taxed if they amount to less than the annual exclusion amount. In 2023, the exclusion amount was $17,000; in 2024 it is $18,000. This means you could give someone $17,000 in 2023 and give the same person $18,000 in 2024 without having to file gift tax Form 709.

Even if you must file Form 709, that does not mean you pay gift taxes, at least not yet.

You have a lifetime gift tax exemption, $12,920,000 in 2023, $13,610,000 in 2024. Whenever you exceed the annual exclusion amount, the excess above the exclusion amount reduces your remaining lifetime exemption.

Suppose you give $20,000 to your nephew in 2024, exceeding the $18,000 exclusion amount, so you file Form 709. The excess $2,000 reduces your remaining lifetime exemption by $2,000.

Provided you go your entire life without exceeding your lifetime exemption, you will never have to pay gift taxes while you are alive.

When you pass, your unused lifetime exemption becomes your estate tax exemption amount. So long as the size of your estate is less than this threshold, your estate will not owe estate tax.

Suppose you file Form 709 for $2,000 as described above, but then you pass in 2024. Your estate will only have to pay estate tax if its value exceeds ($13,610,000 – $2,000 = $13,608,000).

Please note: the Tax Cuts and Jobs Act of 2017 raised the lifetime exemption temporarily. Without new legislative action, the lifetime exemption will revert in 2026 to some $5 million.

1 https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax

As described above, the annual exclusion pertains to a single giver and a single recipient. Giving above the exclusion amount requires filing Form 709 to report the excess.

For joint gifts by a couple, the exclusion amount doubles. In 2024, a couple may give someone $36,000 without having to file Form 709.

Essentially taxpayers have a unified gift/estate credit, which the taxpayer may apply over his lifetime and at death. Gifts during one’s life, more than annual exclusion amounts, count against the credit, and bequests at death count against whatever credit remains.

When the first person in a married couple passes, any unused credit passes to the surviving spouse. This means if a person passes in 2024 with unused credit, his spouse will now have $27,220,000 in lifetime credit.

Not until or unless you exceed your lifetime exemption. However, if your gifts to one person exceed the annual exclusion amount, you will have to file Form 709 for that year reporting the excess, which will count against your lifetime credit.

The donor, not the recipient.

Up to the annual exclusion amount to one recipient each year.

Gifts below the annual exclusion amount do not require filing Form 709 and therefore do not count against your lifetime exemption.

If you give them the money for tuition, room and board, the gift is subject to filing Form 709 if the value exceeds the annual exclusion amount.

If however you pay the educational institution directly, it is not a taxable gift.

If you give the patient the money directly, the gift is subject to filing Form 709 if the value exceeds the annual exclusion amount.

If instead you pay the creditors directly, it is not a taxable gift.

Yes. The amount below the market price is a taxable gift.

Yes. The amount forgiven is a taxable gift.

Yes. The way to lend money without the IRS regarding the loan to be a taxable gift is to charge the Applicable Federal Rate (AFR), which the IRS updates monthly.

The AFR is an IRS mandated interest rate for lending between private parties. As you might expect from any schedule of lending rates, the AFR depends on the term of the loan. Unlike most lending rates, creditworthiness of the borrower does not enter into the rate determination.

If a person lends a substantial amount to another private party and does not charge the AFR, the IRS may determine what the AFR should have been and calculate the forgone interest. If the foregone interest in a year exceeds the annual exclusion amount, the IRS may deem the foregone interest a taxable gift.

If you intend to give a large amount of wealth to a single recipient and it is possible to do so in increments, consider spreading your gifts incrementally over several years, keeping each increment to individual recipients under the annual exclusion each year.

Explore your ability to use trusts as estate and tax planning vehicles. Trust law varies by state, so consider consulting local branches of a trust bank or local estate planning professionals.

Even more advanced strategies include life insurance trusts, which again require the assistance of knowledgeable professionals.

Something worth noting is the prospect of Generation Skipping Transfer Taxes (GSTTs). GSTTs apply when the transfer recipient is more than 37.5 years younger than the giver. GSTT has its own rules pertaining to exclusions and lifetime exemptions, which can seem like gift tax rules, but GSTTs are different from gift taxes. When GSTTs apply, they are levied in addition to any applicable gift taxes, so it is desirable to avoid having to pay them.

Owners of family businesses face issues that are beyond the scope of this post.

Before attempting any of these more advanced strategies, find knowledgeable professional guidance.