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FILING YOUR TAXES
Mark Steber
Chief Tax Information Officer
Published on: August 07, 2023
Throughout our lives, we all want to help our family and friends with gifts. But sending a $100 gift card for a birthday is different than gifting someone a house or handing over a large sum, of course, and it may mean that the gift giver may have to pay taxes. The IRS becomes involved when a gift giver goes over certain thresholds, called the annual gift tax exclusion and the lifetime gift tax exclusion. Read on to find out about what these limits are, how to report your gift tax on your tax return, and more.
What is the gift tax? Federal gift tax explained.
We will delve into an overview below, but because every situation is different, you’ll want to speak with your Tax Pro, and likely an attorney, before considering the best next steps for giving very large gifts.
Broadly speaking, the gift tax is a federal tax on transfers of money or property to other people who are giving you nothing—or little—in return.
By “little,” the IRS specifically means less than fair-market value. For example, if you spent $20,000 on a new car, and then sold it to a friend for $500, the IRS would probably view that sale as a gift from a tax point of view. So it’s always good to check in with experts along the way. We will go into more detail on what taxable and non-taxable gifts are below.
What gifts do you need to report?
Beyond the annual and lifetime gift tax exclusion thresholds (more on those below), you’d generally expect to pay a gift tax on:
- Direct gifts. You transfer cash, a car, or other forms of property directly to another person.
- Indirect gifts.You make a gift on behalf of another person. A good example of this is paying off someone’s credit card balance for them.
- Complete gifts.You give up all rights to a property after it is transferred to another person.
- Incomplete gifts. The opposite of a complete gift. It is a gift where you still keep authority over the gift after you’ve transferred it to someone else. A good example of this is “revocable trust,” because the trust is still under the donor’s control.
- Reversionary interest.You transfer property to another person only for a limited time. A good example of this is a trust that has a cut-off date, where the trust is set to transfer back to you. In this case, the value of the gift is less than the value of the property, since it’s temporary.
- Net gifts.This is the only case where the recipient—not the donor—will pay a gift tax when it’s time to file.
What isn’t considered a gift and therefore not taxed?
As alluded to above, the IRS will not tax you on certain gifts you make. The rules are centered around the context of the gift-giving and the underlying “why” of the gift-giving. We outline some examples below, but again, always reach out to a Tax Pro and in some cases, attorneys, to make sure that you’re proceeding properly.
What is considered a taxable gift versus a non-taxable gift?
Taxable gift | Non-taxable gift |
Cash | Educational expenses for someone else |
Securities, such as stocks and bonds | Medical expenses for someone else |
Real estate and vehicles | Gifts to a spouse |
Art | Gifts and donations to political organizations |
- Qualified transfers.You’re not taxed on payments you make directly to a qualified academic institution or medical provider. For example, grandparents paying for a grandchild's college tuition and fees.
- Support payments.You may not need to pay tax on legal obligations for children or other dependents. A prime example of this would be child support to the guardian of your child or dependent.
- Divorce settlement payments.You’re not taxed on alimony you pay if the agreement was signed
- Donations to political organizations.The IRS views this as advocating, or voting, for a public service, and won’t tax you. The contribution is also not deductible from total income.
- Business transfers.The IRS considers most of these as another form of compensation for work and are therefore not considered gifts.
- Gifts between spouses.You won’t pay a gift tax on money passing between you and your spouse, as long as you’re U.S. citizens. If one of you isn’t a U.S. citizen, then there is a limit on the tax-exempt transfer.
What is the annual gift tax exclusion?
The maximum amount you can give in 2023 before having to pay tax on it is up to $17,000. Formally referred to as the annual gift tax exclusion, if you give away more than this amount in a year, you’ll need to file a gift tax return for that tax year, paying tax on any amount over $17,000. The IRS adjusts the gift tax exclusion limit yearly for inflation.
What is the lifetime gift tax exemption?
The lifetime gift tax exemption is the amount of money or assets the government allows you to give away over your lifetime without paying the federal gift tax.
For 2023, the lifetime gift tax exemption is $12.92 million. This means you can give up to $12.92 million in gifts over your lifetime to each child without paying gift tax on it. For married couples, both spouses get the $12.92 million exemption. This means that if you are married, you and your spouse could give away a total of $25.84 million before paying the gift tax. It’s crucial to check with your Tax Pro and attorneys on what the limit is for every year, because it changes.
How do I calculate a gift tax on my tax return?
Like federal income tax, the gift tax rate depends on the value of the gift. The higher the value of the gift, the more you’ll have to pay in a gift tax.
To calculate the gift tax, use the following tax brackets when completing the return for either 2022 or 2023. A Tax Pro will be able to best calculate and guide you.
Federal gift tax rates
Taxable amount exceeding annual gift limit | Gift tax rate |
$0 — 10,000 | 18% |
$10,001 — 20,000 | 20% |
$20,001 — 40,000 | 22% |
$40,001 — 60,000 | 24% |
$60,001 — 80,000 | 26% |
$80,001 — 100,000 | 38% |
$100,001 — 150,000 | 30% |
$150,001 — 250,000 | 32% |
$250,001 — 500,000 | 34% |
$500,001 — 750,000 | 37% |
$750,001 — 1,000,000 | 39% |
$1,000,001 or more | 40% |
How do I report gifted money on my tax return?
If you made a taxable gift contribution this year (again, one that exceeds $17,000 for 2023), you will need to file “IRS Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return,” in addition to your annual tax return.
And even if you haven’t exceeded your lifetime limit of $12.92 million in gifts and won’t have to pay taxes on this year’s gift, you still need to report the excess gift to the IRS.
The broader tax code and various limits change every year. A Jackson Hewitt Tax Pro can answer your tax questions and concerns if you’ve made a gift this year or are looking to make one in the future. Find one near you today.
Frequently asked questions
The giver (donor) of the gift is generally responsible for paying the gift tax. Under special arrangements, the recipient of the gift may pay the tax instead. A Tax Pro can help advise you. It’s important to note that the earnings from investing money, or selling assets received after the gift is accepted, are taxable to the recipient of the gift.
No, not typically. Gifts between spouses are considered unlimited and do not generally trigger a gift tax return. However, if one spouse is not a U.S. citizen, then special IRS rules may apply. Talk to your local Tax Pro to learn more.
California, Florida, Virginia, Washington D.C., and Wisconsin do not have an estate, gift, or inheritance tax.
Your parents can each give you up to $17,000 each in 2023 and it isn’t taxed. However, any amount that exceeds that will need to be reported to the IRS by your parents and will count against their lifetime limit of $12.9 million. Keep in mind that the annual gift limit of $17,000 is per person, not a joint amount.
If you’re still a dependent of your parents and they’re paying for your higher education--room and board for example--this isn’t considered a gift. A transfer of $100,000 to you directly is considered a gift and may be taxable to the giver.
If the gift money exceeds the annual amount for that tax year ($16,000 for 2022 and $17,000 for 2023), then yes, but only for the person giving the gift. The giver(s) needs to file Gift Tax Return, Form 709 if they made a gift payment to another person that’s more than their annual limit.
Gift and estate tax returns are more likely to be audited by the IRS when there are taxes owed, and the size of the transaction or estate is relatively large.
If an unusual gift occurs, which is one that’s not traded on the market like a private business or a government-related gift, then a qualified appraisal of that gift may be required by the IRS to determine the gift’s value. Or, if the IRS suspects the appraisal of the gift is an error, that could trigger an audit.
There are a few other less common reasons you could be audited over a gift tax. The best way to prevent this is to file with a Tax P or have one do a recheck of your filed tax return.
The donor of the gift reports their contribution to another person by filing a gift tax return for that tax year, using Form 709.
You can do that legally, yes, but be mindful of local and state laws surrounding gift taxes and real estate. If you give your $500,000 home away for $1, the value of the home to the recipient is $1. The fair-market value will be $499,999 for the recipient and part of the lifetime gift tax limit ($12.9 million for 2023) for you.
If you leave your home to a family member or person in your will after you’ve passed, the value of the home is the fair-market value on the date of death. An inheritance is never a gift. Be sure and speak with a local, qualified property lawyer, as well as with your Tax Pro, beforehand to avoid legal and financial pitfalls.
About the Author
Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.
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