Commonsense CPA: Annual US Gifting Limits Explained (2023
In the United States, the Internal Revenue Service (IRS) imposes limits on the amount of money or assets an individual can gift to another person without incurring gift taxes. These limits, known as the annual gifting limits, are adjusted periodically to account for inflation. Understanding the annual gifting limits and the associated tax implications can help individuals make informed decisions when giving gifts to loved ones or other recipients.
How Do Gifts and Gift Taxes Work
For 2023, the annual gifting limit is set at $16,000 per recipient. This means that an individual can give up to $16,000 in cash or other assets to any number of recipients without any tax consequences. The gifts can be made to family members, friends, or anyone else, and the recipients do not have to report the gifts as income.
The annual gifting limits apply per person, which means that couples can give twice as much if they separate their gifts. For example, if a husband and wife want to give a gift to their child, they can each give up to $16,000, making the total gift amount $32,000 without any gift tax consequences.
If the total gift amount from one person to another exceeds the annual gifting limit of $16,000, the giver is required to file a gift tax return, Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return with the IRS. This does not necessarily mean that gift taxes will be due; it simply informs the IRS of the gift.
In addition to the annual gifting limit, there is a lifetime gift tax exemption. As of 2023, the lifetime exemption is $12.06 million per person. If the total value of gifts given by an individual throughout their lifetime exceeds the annual gifting limits, but does not exceed the lifetime exemption, the giver may not owe any gift taxes.
Gifts can be subject to gift taxes if they exceed the annual gifting limits and the lifetime exemption. The tax rate for gifts varies, depending on the amount given, and can range from 18% to 40%.
It's important to note that certain gifts are not subject to the annual gifting limits:
Gifts to a spouse who is a U.S. citizen are generally exempt from gift taxes.
Gifts to qualified charities are exempt from gift taxes and can also provide the giver with a tax deduction.
Payments made directly to an educational institution for tuition (not including room and board, books, or other expenses) are exempt from gift taxes.
Payments made directly to a medical provider for someone else's medical expenses are also exempt from gift taxes.
What if I Don’t File
If you do not file a gift tax return (Form 709) when required, you may be subject to penalties imposed by the Internal Revenue Service (IRS). There are two main types of penalties that may apply: failure-to-file and failure-to-pay penalties.
Failure-to-file penalty: If you do not file the gift tax return by the due date (typically April 15th of the year following the year the gift was made), you may be charged a failure-to-file penalty. The penalty is usually 5% of the unpaid gift tax for each month (or part of a month) that the return is late, up to a maximum of 25% of the unpaid tax. If the return is more than 60 days late, the minimum penalty is the smaller of $435 (as of 2021) or 100% of the unpaid tax.
Failure-to-pay penalty: If you do not pay the gift tax owed by the due date, you may be charged a failure-to-pay penalty. The penalty is generally 0.5% of the unpaid tax for each month (or part of a month) the tax remains unpaid, up to a maximum of 25% of the unpaid tax.
In addition to the above penalties, interest will be charged on the unpaid gift tax and penalties from the due date of the return until the tax and penalties are paid in full. The interest rate is determined quarterly by the IRS and is based on the federal short-term rate plus 3 percentage points.
tl;dr
Recipients of gifts do not have any reporting requirements for the gifts and do not pay taxes on them.
Givers of gifts should file a Gift Tax Return to report the gift to the IRS if the amount is higher than the annual limit. This is an information return - taxes will not usually be due with this, but the IRS penalizes taxpayers who don’t file or who file late.
Like everything the IRS touches, gifts can get a little bit complicated, but with a general understanding of the rules you can stay compliant and avoid any issues. If you are uncertain about your gift tax obligations, or considering a big gift anytime in the future, your Harmony Tax team is available to consult with you for personalized advice on gifting and tax planning.
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