The Internal Revenue Service defines a gift as “Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.”
Unfortunately, the IRS considers any gift you give to someone else as a taxable event, with a few exceptions, such as the following:
- Gifts of lesser value than the annual gift tax exclusion amount
- Gifts to your spouse
- Gifts of medical expense or tuition payments
- Gifts to political organizations
- Gifts to qualifying charities
Except for the final category above, you cannot deduct the value of gifts on your income tax return.
Gift Tax Exclusion
Under current law, gift tax rates range from 18% to 40% depending on the value of the gift. Luckily, however, there’s also an annual gift tax exclusion. For 2021, you pay no gift tax on any gift you make to a single individual worth up to $15,000. So, if you have three children, you can give each of them $15,000 in any one year, for a total of $45,000, without incurring any gift tax. This amount doubles when you and your spouse make a joint gift. In the above example, this would allow you and your spouse to make a $30,000 gift to each of your children, for a total of $90,000 in tax-free gifts annually.
In addition to the annual exclusion, however, there’s also a lifetime exclusion. Under current law, this amounts to $11.7 million for an individual and $23.4 million for a couple. Keep in mind that this lifetime exclusion came about as a result of the Tax Cut and Jobs Act of 2017. Consequently, it only applies until 2025. After then, the lifetime exclusion will revert to its pre-2018 level of $5.49 million for an individual and $10.98 million for a couple, barring any extensions that Congress may pass.
Gift Tax Return
If you find yourself in the position of having to file a gift tax return, know that you won’t have to pay taxes on the full amount of your gift(s). You’ll only pay tax on the amount by which your gift(s) exceed the annual exclusion for that year.
Gifting as Part of Your Overall Estate Plan
Strategic gifting can serve as a significant part of your overall estate plan. Your wisest course of action is to consult an experienced estate planning lawyer who can answer all of your questions and help you determine if gifting is right for you.