The rules surrounding taxes on gifts often create confusion during tax season or any other time. Below are some of the nuts and bolts of the gift tax, including when a gift tax form needs to be filed.
What Is the 2023 Gift Tax Exclusion?
The annual gift tax exclusion is $17,000 for 2023. This means that any person who gave away $17,000 or less to any one individual (anyone other than their spouse) in 2023 does not have to report the gift or gifts to the IRS.
Any person who gave away more than $17,000 to any one person, however, is technically required to file a Form 709, the gift tax return. But just because you are required to file a Form 709 doesn't mean you necessarily have to; this depends on your past gift-giving history.
Lifetime Exclusion
The IRS allows you to give away a total of $12.92 million (in 2023) during your lifetime before a gift tax is owed. This $12.92 million exclusion means that even if you are technically required to file a Form 709 because you gave away more than $17,000 to any one person last year, you will owe taxes only if you have given away more than a total of $12.92 million in the past.
As a result, the filing of a Form 709 is irrelevant for most people because most people don't have $12.92 million to give away. Note that the gift tax exclusion is set to be cut in half in 2026.
How to Avoid Gift Taxes
For those who have the means, there are several ways to give away more than $12.92 million over a lifetime without owing taxes. Keep in mind that Form 709 is only required when you give away more than the annual exclusion.
For example, a married couple with a married child can give away $68,000 in one year without having to report the gift:
Each parent gives the child and the child's spouse $17,000 each. If a couple did this for 25 years, they would have given away $1.7 million without even having to report the gifts, much less having them count against their lifetime $12.92 million exclusion. It would also be possible for the couple to give away $136,000 within a short span of time — $68,000 in December and $68,000 in January of the next calendar year.
(Note that if both spouses have made gifts, each must file a separate Form 709.)
The Type of Gift Matters
Another way for a gift to be exempted from reporting requirements, no matter the gift's size, is to pay for someone else's medical care or school tuition. The money must be paid directly to the school, university, or health care provider to be exempt, and pre-payments can often be made as soon as the person is admitted to the school (educational institutions include not just colleges but nursery schools, private grade schools, or private high schools).
However, if you contribute to someone else's 529 college savings plan, you are subject to the $17,000 gift exclusion rule. A special regulation in the tax code enables a donor to use up five years' worth of their exclusions and gift $85,000 (in 2023) to a 529 at one time.
Gifts to a Spouse or Charity
Gifts to a spouse are usually not subject to any federal gift taxes as long as your spouse is a US citizen. If your spouse is not a US citizen, you can give only $175,000 without reporting the gift (in 2023). Anything over that amount has to be reported on Form 709.
If you have given away property other than money, like stock, you have to report that on your gift return, too, if the value is more than $17,000. If the stock has gone up in value since you bought it, you report the value as of the date that you gave it away.
You may want to inform the recipient that the basis, or the amount that you bought the stock for, becomes their basis. It is used to determine the profit or loss when the property is sold.
Finally, tax-deductible gifts made to charities need not be reported on a gift tax return unless the donor retains some interest in the gifted property.
For more information on gift taxes, find an estate planning or elder law attorney near you.