What Is the Gift Tax – IRS Rules, Rate & Maximum Exclusion Limit

gift tax moneyAre you considering transferring wealth, assets, or property to your heirs? You may be in for a much more difficult – and costly – effort than you realize. If you’re in a position to help out younger family members or friends, or if you’re wondering how best to transfer your estate after you pass on, it’s important to be aware that it isn’t always free.

Some gifts are not subject to tax, but many are. A quick study of the IRS gift tax regulations can prevent you from taking an unnecessarily large tax hit and help you plan how to best transfer your wealth. In addition to familiarizing yourself with IRS gifting rules, it’s also advisable to contact an estate planner or attorney to make sure your heirs receive everything they’re entitled to.

What Is a Gift?

Leave it to the IRS to take a word that sounds perfectly simple and pleasant and give it a complicated definition. Basically, any financial assistance or monetary transfer – direct or indirect – is a gift in the eyes of the IRS, so long as the person receiving the cash doesn’t reciprocate with something else of the same value.

By that definition, gifts come into play in many situations, such as giving money to a friend or family member just to help them out. Or, if you “overpay” and do not receive something in exchange of equal value, it’s considered a gift and could be subject to taxes. Generally, though, a friendly transaction like this one would have to be blatant and extreme for the IRS to take notice.

Gift taxes are paid by the person who gives the gift in all but the rarest of circumstances. However, don’t confuse generosity with charity – you can’t deduct gifts on your tax return.

Understanding the Gift Tax

Any individual can accept a gift up to the federal gift tax exclusion amount, which is $14,000 per year on or after January 1, 2015, without the giver incurring a tax penalty or having to report the gift (the exclusion amount remains $14,000 for the 2016 tax year). Further, gift givers can subtract amounts greater than $14,000 from a lifetime exemption amount (without having to pay taxes on it). This is known as the unified credit. This amount was $5.43 million per person in the 2015 tax year, and is $5.45 million in the 2016 tax year. However, givers must report these gifts to the IRS by filing a gift tax return, or Form 709.

Keep in mind, however, that tapping your unified credit reduces the amount that can be excluded from your federal estate tax when you die. For example, if you use $2 million of your unified credit in 2016, your estate tax exclusion would be $3.45 million instead of $5.45 million.

As long as your individual gifts are less than the annual gift tax exclusion amount, you may give to as many individuals as you’d like – you won’t reduce your unified credit or, in turn, your estate tax exemption.

monetary gift

Tax Exemptions

Fortunately, there are plenty of circumstances in which you can provide assistance, but needn’t declare that assistance as a gift.

  • Education: If you pay your niece’s college tuition, even if it costs more than $14,000 per year, it isn’t considered a gift. In fact, education expenses aren’t considered gifts at any education level, not just college.
  • Health: If your brother has heart surgery and you pay the bills because he doesn’t have health insurance, or if your grandmother needs assistance and you pay for a home health aide, the cost would not be considered a gift.
  • Spouse: If you and your spouse maintain separate bank accounts or investment accounts, you may give each other as much money as you’d like without considering it a taxable gift. There is one catch: You must both be American citizens. If you’re not, the spouse who isn’t a citizen is subject to a yearly limit once he or she exhausts the lifetime exemption amount, or unified credit. Luckily, the yearly limit isn’t $14,000 in this case – in 2015, you could have given up to $147,000 (in 2016, you can give $148,000).
  • Politics: You may donate to political organizations without paying any taxes. These are not charitable donations, however, so you can’t deduct them on your return.

Different Forms of Gifts

When gifts take the form of stocks or real estate, the $14,000 per person limit still applies. Gift givers must base their numbers on fair market value. For example, if you give a gift of stock shares, you’d calculate the market value of your stock on the day it’s transferred. If you are gifting property, you must get an appraisal to determine the current value. You should also provide the recipient with your cost basis – how much the stock or property cost you when you bought it – so the recipient can calculate the gain, should they sell it.

Suppose you bought 100 shares of stock at $10 each, but the day you transferred them to your son, the shares were worth $100 each. If your son holds them for a few years and then sells them at $120 each, he has to pay capital gains tax on $110 per share of stock – the $120 he sold them for, minus the $10 you bought them for. Similarly, if you gift your daughter a house that was worth $100,000, but you purchased it for $60,000, even if she sells it for $100,000 she still must pay taxes on $40,000. Regardless of your particular situation, it pays to speak with a qualified estate planner and tax professional to best determine how to transfer your wealth and maximize your tax strategy.

Also, keep in mind that you and your spouse may gift the annual limit separately. So each of you may separately gift up to $14,000 to the same individual, for a total of $28,000 before paying taxes. This applies to jointly shared property as well. So, if you and your spouse jointly own a plot of land worth $25,000, you could gift it to your son or daughter without tax penalty because you would each be gifting the equivalent of $12,500 – an amount less than the $14,000 limit.

Final Word

Most people enjoy giving to their family and friends, and with the rising limits on gift tax exclusions, it’s becoming easier for everyone. The rules are very complicated, though, so it’s best to consult a CPA when considering this financial move. Keep in mind that if you are married, even if you file taxes jointly, you and your spouse need to fill out separate gift tax forms – Form 709 – since you each have your own unified credit “bank” to use up during your lifetime.

Are you planning on using gifts to reduce your estate or help your family?

  • http://nyelves.com Ray Thomas

    Hey Kira,

    I’m just curious if you know the answer to this…I just lost my job so my parents want to help pay off my mortgage. The contribution would about $200,000! I don’t know if I should accept such a large gift due to the tax implication…If I can eventually sell my house I’d give them back the money so it’s kind of a long-term loan without interest…how do they deal with that? Thanks so much!

  • Kira Botkin

    The best course would be to have them write a check to the mortgage company directly, not to you. That amount would come under the unified credit amount, so either way they would not have any taxes due. And remember that recipients never owe any gift tax, only the givers do. In either circumstance you would not owe anything. It would unwise to try to structure it as a long-term loan with no interest, because the IRS sees that as a gift anyway. In order to be a loan you have to collect a minimal amount of interest and have a set repayment period.

    Basically either way your parents are free to give you $200k and you are free to give them $200k at some later date, because you’re covered under the unified credit amount. If you want to avoid the issue of gift tax altogether, have your parents write the check directly to the mortgage servicing company. (You should call ahead and ask them for instructions and an exact payoff amount, at any rate.)

  • Ray

    Hi Kira, I am a foreign person and would like to gift my partners children $99,999-00 what tax implications would there be for them and me.

    Ray B-S

    • Kira Botkin

      Hi Ray, you should probably check with a tax advisor in your country, since under American tax law the children wouldn’t be taxed, but you might be.

  • Tony

    Is the $26,000 annual limit for a married couple filing jointly in total for the year in 2011 or by recipient?

    • Kira Botkin

      It’s by recipient. So if you wanted to jointly give $26,000 to each of ten people, that would be fine, since you are still under the unified credit. If you go over that, you should consult an accountant as you may need to pay gift tax.

  • Tabudiyo

    Hi Kira,

    Could my business pay part of my mortgage ($15K)? Who pays the taxes? Do I or corporation owe gift tax?

    • Kira Botkin

      A corporation cannot give gifts to its owner.

  • Beebs46

    Hi Kira,

    My father is Brazilian and I am an American Citizen. He would like to gift me an amount larger than $13,000. Does the $13,000 limit apply if the donor is not an American? Would I face any tax penalties?

    • Kira Botkin

      The recipient never pays any tax, only the donor does. So the American laws really don’t apply here. If your father is not an American citizen, didn’t live in America, and didn’t earn his money in America, Brazilian tax law would apply to him here.

  • Dad

    My wife and I want to help our daughter and son-in-law buy a house. I understand that we could give (as a married couple) $28,000.00 per year to our daughter. My question is……can we also give our son-in-law $28,000.00 in the same year or is there a restriction since they’re married?

    • B Cause

      Yes!! One couple can give another couple The total of $56,000 per year as a “gift”.
      Your daughter and son-in-law count as two individual people at $14,000 a piece @ $14,000 from you and $14,000 from your wife To each one of them.. Totaling $56,000.

  • Gia

    I am US resident and had given my sister about $14K in cash. However, she is not a resident nor a citizen of the US, and resides in other country. Is that consider that a gift? If so, would that be a deductible to my income when I file my return?

    • Norm Glitz

      Your gifts are not deductible unless the giftee (sister) is a 501c3 charity. Sounds like she’s not.

  • ruehawk

    Can one give a gift of 14,000 to an adult son? Then accept a gift the following year from that son for 1,500?

    • B Cause

      Yes, As long as as that “gift” is under $14,000.

  • Norm

    What tax forms do you fill out if you received a financial gift from a friend and the gift exceeds $14,000? Where do you claim it on your 1040?

    • Norm Glitz

      You don’t. The giver needs to fill in the Form 709.

  • Bob6237

    Dear Ms Botkin, my wife and I (pensioners) live in Australia. Does the US Treasury have the authority to impose gift tax on my gift of a $260,000 Australian property to my Australian wife? We bought the property with money transferred from America 15 years ago.

  • Casey

    My son gives us a gift under $14,000, can he deduct the gift money on his 1040 tax return?

    • B Cause

      As stated above.. “No”… Gift money is not tax deductible!!
      Only charities are tax deductible..

  • Mayank

    Hello Kira, my father’s friend living outside US (he is not an American citizen, didn’t live in America, and didn’t earn his money in America) wants to gift me under $10,000. Do I or my father’s friend have to pay tax on this amount?

  • Aru

    Hi Kira,
    This is becoming a headache for me, so i need help. I am a US permanent resident (Green Card holder) and my husband is a US Citizen. I see that US Citizen can gift their non-citizen spouses around $140,000/year without having to report this to IRS. Are there tax implications if I move any of/or this entire gift to my personal bank account to India? Can my husband directly wire the gifted amount to my bank account in India? Will i have to fill out any form since this gift is going overseas? I am wondering if the gift limit is only applicable to inside US transfers….or is it also applicable to transferred outside US.
    I would really appreciate your help…I have been chewing over this for a while now, but don’t know what to do.