Each year the IRS sets limits on the amount of cash and/or property (dollar value) you can give to others. There is a limit both for what can be given each year, as well as, what total amount can be given over one’s lifetime. Anytime you exceed those limits, there will be taxes due on the amount of the gifts that exceed the specified limits. The taxes on any gifts over the limits are called “Gift Taxes”.
Whoever makes gifts to another is responsible for paying the gift tax. The recipient of the gift has no responsibility or liability for payment of this tax, unless he or she has made an agreement with the donor of the gift to be liable for its payment.
The Annual Gift Tax Exclusion
For 2019 the amount one can give to another within one year is $15,000, which is the same as it was in 2018. Periodically, this amount has been adjusted higher to account for any inflation that has occurred in personal consumption expenses.
No gift taxes will be owed if the total value of gifts to any one individual do not exceed $15,000. So, it is important to remember that, if audited, the Internal Revenue Service may check for any and all gifts made during the year, including the value of any birthday, holiday, and other gifts. To be safe from tax liability, you should make sure that the cumulative value of all gifts made remain within the exclusion limit.
Each year, you can make individual gifts (up to the $15,000 limit per donee) to as many donees as you want without owing any gift taxes. If you are married, your spouse can also make gifts using his or her own gift tax exclusion, which would permit the total maximum gift (to any one individual) to be doubled to $30,000.
If you do gift more than the maximum permitted for the year, it must be reported to the IRS on your personal tax return for that year. If you do not elect to use your “Lifetime Exemption” discussed below, you will owe the calculated tax that is due as part of that year’s income tax return.
The Lifetime Gift Tax Exemption
Most individuals will never need to pay gift tax on their gifts over the annual limit, because the IRS allows you to gift up to $11,400,000 (as of 2019) over your lifetime. This amount is adjusted periodically by Congressional legislation and for inflation. It was increased from 2018’s $11,180,000 level. The 2017 Tax Cuts and Jobs Act that was passed in 2017 doubled the exemption amount that had previously been $5,490,000.
So, if you make a gift to anyone above the year’s annual limit, you can elect to deduct the excess amount from your total lifetime limit.
An Illustrative Example:
If a $115,000 gift was made to help a child to purchase a home. The $100,000 excess over the annual limit can, if elected on your tax return, be deducted from your $11,400,000 lifetime exemption leaving a remaining $11,300,000 balance that can be used for any annual future gifts that are in excess of the current annual limit.
The lifetime Gift Tax Exemption and The Federal Estate Tax Exemption
The lifetime gift tax exemption is shared jointly with the federal Estate Tax Exemption that is applied to one’s estate after death. This means that the total death value of your estate will be subject to Federal Estate Tax if it exceeds the total remaining lifetime gift tax exemption that has not been previously used. That remaining exemption amount becomes your remaining Federal Estate Tax Exemption.
Some Gifts Escape Gift Tax Liability
Taxable gifts can include cash, property, interest-free loans, and anything that is given for less than its “fair-market value”. However, some gifts are permitted by the IRS that will not be counted against the annual and lifetime limits.
These gifts that are unlimited include:
-Gifts to a spouse that also a U.S. citizen
-Gifts to anyone who is also a dependent
-Gifts to charities
-Political donations
-Gifts paid directly to educational institutions on behalf of someone else for tuition
-Gifts paid directly to medical or health providers on behalf of someone else
How to Report Gifts on Your Federal Income Tax Return
IRS Form 709 United States Gift Tax Return should be added to your federal income tax return for any year that annual gifts exceed the individual annual limit. When completing this form, you will have the opportunity to elect to either pay a gift tax or, as is most often elected, apply the excess gift amount against the lifetime annual limit.
The following link to the IRS website will provide additional detailed information regarding the most often asked questions about gifts and taxes:
Greg Tinaglia
Last Updated: 10/11/2019