How the IRS defines a gift
The Internal Revenue Service leaves no room for confusion as to what the gift tax is and how it works. As the name suggests, it’s a tax levied on any property that changes hands where the giver receives nothing in return. The IRS notes this tax will apply whether or not the individual giving someone property intends it as a gift.
The gift tax can also apply to instances where the person giving the property does not receive something of equal value in return. If, for example, you sell your house at well below market value to provide your child with a starter home, that would qualify as a gift.
While the IRS uses the term property in defining the tax, giving someone money indeed counts as a gift. Given the IRS’ guidelines, an interest-free or reduced-interest loan may also qualify for the gift tax because you’re not receiving full consideration (market-rate interest) for your money.
Exceptions to the gift tax
According to the IRS, any gift is a taxable gift from a general perspective. There are, however, multiple exceptions that would preclude you from needing to pay a gift tax.
Chiefly, any gifts not exceeding the annual exclusion for a given year are not taxable. According to NerdWallet’s Tina Orem, the maximum annual exclusion for 2021 was $15,000 per recipient. For 2022, it has increased to $16,000 per recipient. This means you could give multiple people gifts in a calendar year and still not need to worry about filling out an IRS Form 709.
Orem also notes the IRS has a maximum lifetime gift tax exclusion, but its threshold is high enough that most people will never need to worry about coming close to hitting it. In 2021, the lifetime max was $11.7 million. For 2022, it will be $12.06 million. For context, you could give $50,000 in total gifts every year and it would take you 234 years to hit the maximum exclusion at the current total.
The IRS also outlines several other common exclusions to the gift tax. Gifts between spouses are not taxable, which means you can honor anniversaries and birthdays with as much generosity as your heart (and wallet) can muster. You can also pay off tuition or medical expenses for anyone — be they family or friend — under the educational and medical exclusions.
What to do if you exceed the maximum gift exclusion
If you buy your mother a nice car or pay for your child’s wedding, you may blow past the $15,000 maximum annual exclusion fairly easily. In this case, you will need to file an IRS Form 709. For this, the IRS recommends documenting the fair market value of your gift.
The IRS notes the donor of a gift is usually the one responsible for filing and paying any tax, but you can make an arrangement in which the recipient pays the tax amount. For these situations, the IRS recommends talking to a tax professional, and working with an attorney or certified public accountant on issues related to your estate, will, or trust.
While you likely won’t need to worry about the gift tax outside of specific circumstances, it’s always a good idea to consult a tax professional if you’re unsure. A tax pro can put your mind at ease so that you can give freely and without fear of needing to pay Uncle Sam.