Annual exclusion giftsPayments for some educational expensesPayments for medical expensesGifts made to certain political organizations
What Counts as a Gift?
The Internal Revenue Code (IRC) considers a gift to be any property that’s transferred to a non-spouse beneficiary with no cash or other monetary value received in exchange and when no exclusion applies.
Annual Exclusion for Gift Taxes
The annual exclusion for gifts is the amount up to which you can give someone before paying any federal taxes. The amount changes every so often. For tax year 2022, it’s $16,000 per person, and for tax year 2023, it’s $17,000. Under the IRC, a transfer is not a taxable gift if the value of the property transferred is below the annual amount. This annual exclusion is indexed for inflation, so it can increase on an annual basis. But it must increase in $1,000 increments, so it sometimes sits at the same amount for a year or more before it bumps upward.
Gifts Made to Spouses
Gifts between spouses are covered by the “unlimited marital deduction.” This rule states that you can give everything you own to your spouse, either during your lifetime or at your death, without incurring gift or estate tax on the value of that property. Gifts made to a spouse who isn’t a U.S. citizen are treated differently. These gifts have their own annual exclusion amount. For tax year 2022, the amount is $164.000. For tax year 2023, it’s $175,000.
Gifts Made Together by Spouses
Married couples can combine their annual exclusions and gift double the annual exclusion amount or less to an individual per year without incurring any gift tax liability. So for 2022, that’s $32,000 and for 2023, that’s $34,000. Couples still have to file a federal gift tax return using IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return, to report these “split gifts,” even if they limit their gift to double the annual exclusion amount.
Educational Expenses and Gift Taxes
Payments made directly to a qualifying domestic or foreign learning institution for the education of an individual qualify for the educational exclusion under Section 170(b)(1)(A)(ii) of the IRC. You can pay your child’s or grandchild’s college tuition in the amount of $20,000 and give them an additional $16,000 in the same year without incurring any federal gift tax. A few rules apply:
Medical Expenses and Gift Taxes
Payments that qualify for the medical exclusion include those made directly to a medical institution or care provider for the benefit of an individual. You can also make the payment to a company that provides medical insurance to that person. Expenses that qualify are the same as those that are deductible for income tax purposes. You can pay for your grandchild’s emergency appendectomy in the amount of $20,000 and also give them an additional $16,000 in the same year without incurring any federal gift tax. Again, the payment must be made directly to the care provider, the institution providing the medical care, or the company providing the medical insurance. You can’t give the money to the individual receiving the medical care or the insurance benefit, or the payment will be considered a taxable gift if it exceeds the annual exclusion amount.
Gifts to Political Organizations
These are covered under Section 527(e)(1) of the Internal Revenue Code. Your gift must be used for the benefit of the organization, not passed on to anyone else. You can give to a few tax-exempt organizations as well as others detailed under Section 501 of the tax code. These can include civic leagues, horticultural and agricultural organizations, and labor organizations, but not labor unions. The organization must be classified as tax-exempt under federal law.
Filing a Gift Tax Return
Gift tax returns are due simultaneously with your regular tax return, Form 1040. You do not have to file one if your gift meets any of the exclusionary rules above, but you must do so otherwise, even if your gift goes over the annual exclusion amount by only $10. You may not need to file a gift tax or pay gift taxes just yet, even if you do file Form 709. That’s because there is a lifetime limit that says you can give up to a certain amount to reduce your estate value when you die. For tax year 2022, the amount is $12.06 million. For 2023, it’s $12.92 million. If during your year of death your estate is valued above that amount, then you’ll need to file an estate tax return and pay taxes on the estate.
