If you want to give money to your children or someone you know during the year, it’s possible that doing so would trigger gift taxes, which usually means filling out some extra paperwork but could require the recipient to pay a higher tax bill. However, gift taxes don’t occur unless you gift a large sum of money. Here’s everything you need to know about gift taxes and when they should be paid. 

What Does a Gift Tax Refer To?

The gift tax is a type of federal tax that’s used on transfers of property or money to someone else while you get nothing in return. Hardly anyone ends up owing gift taxes to the IRS. For the 2023 tax year, taxes aren’t owed unless you provide monetary or property gifts that amount to more than $17,000 during the year. 

If you obtain money as an inheritance or gift, it usually isn’t taxable as income. However, if your assets eventually produce income via dividends or interest, the income you earn could be taxed. The gift tax rate is anywhere from 18-40% based on the size of your gift.

Understanding the Annual Gift Tax Exclusion

To understand how much you can give to your children during the year or how much you and your spouse can give to the same person, you need to understand the annual and lifetime gift tax exclusions. The annual exclusion for 2023 is $17,000, which means that the beneficiary of the gifts you provide won’t need to pay taxes on these funds if they amount to less than $17,000. Keep in mind that the limit for 2022 was $16,000.

Let’s say that you provided your spouse with more than $16,000 in assets or cash during 2022. In this scenario, you would need to file a basic gift tax return. While you don’t need to pay the taxes yourself, Form 709 must still be submitted to the IRS to officially disclose your gift. 

Keep in mind that the annual exclusion is for each recipient, which means that you can provide $15,000 to your spouse and $15,000 to your child during the same year without worrying about taxes. If you’re currently married, you and your spouse are able to provide up to $16,000 each to the same person without the tax kicking in. You can combine your exclusions with “gift splitting”. Any gifts that you and your spouse give to one another won’t be taxed no matter how high the monetary amount. 

What Is the Lifetime Gift Tax Exclusion?

Along with the annual exclusion mentioned above, you also get a $12.92 million lifetime exclusion in 2023, which is higher than the $12.09 exclusion in 2022. If you’re married, you can exclude double this amount in lifetime gifts. If you plan on giving more than the $17,000 amount in 2023, the lifetime exclusion can be useful. Any money that’s higher than $17,000 for the year will effectively “spill over” and be considered part of your lifetime exclusion. 

Let’s say that you provide a friend or sibling with $30,000 in 2023. This gift uses up all of your annual exclusion. You’ll be tasked with filing a gift tax return for the 2023 tax year. However, you likely won’t need to pay the IRS a gift tax. The $13,000 that remains after taking out the annual exclusion is applied to your lifetime exclusion, which means that you won’t pay any taxes until you exceed the exclusion.

The gift tax return that you end up filing is necessary to keep track of your lifetime exclusion. In the event that you don’t provide any monetary gifts during your lifetime, you’ll be able to use the entire exclusion against your estate after your death. While the lifetime exclusion is currently higher than $12 million, it’s set to revert to the pre-2018 levels of $5 million for each individual in 2026. 

Unless you’re planning on providing your child or someone you know with property or assets that are higher than $17,000 in 2023, gift taxes won’t apply to your situation. If you do gift more than $17,000, make sure you fill out the right IRS form to avoid any future headaches. WKB Accounting LLC is here for your accounting needs! Call us at 954-833-7796 to schedule a consultation