What Is the Gift Tax, and How Does It Work?
By Arturo Conde | AUG 30, 2023
Whenever you’re planning on giving away large sums of money, it’s important to consider the federal gift tax. Even if you don’t think you’ll end up having to pay the gift tax - and most people won’t - it’s important to know how it works because there may be paperwork that still pertains to you. If you need help with the gift tax or any other financial planning topics, consider speaking with a financial advisor.
Understanding the Gift Tax
The gift tax, which is only levied by the federal government and not at the state level, applies to anything of value given by one person to another. In order for something to be counted as a gift, the person receiving the gift cannot pay the full value of the gift to the person giving it, though a recipient may pay some amount.
Gifts can be either cash or physical assets. Generally, the person giving the gift must report the gift to the IRS, not the person receiving it. The gift tax exists, in part, to close a loophole to the estate tax. This essentially stops wealthy families from giving money away as gifts before they die to avoid the estate tax that would be levied on their estates upon their death.
What Are the Limits of the Gift Tax?
Not all gifts are going to result in having to pay the gift tax. In fact, for nearly all Americans, the gift tax is something that will simply never apply to them because of the yearly tax exclusion and the lifetime gift tax limit.
For 2023, there is a gift tax exclusion of $17,000 per person. That means you can give up to $17,000 to an unlimited number of people each year without even having to think about the gift tax. You can give $17,000 to the same person the following year and still won’t have to worry about it. Note that this annual exclusion limit could change in future years.
If you give someone more than $17,000 in a year, you have exceeded your exemption. However, you still don’t have to immediately pay gift taxes on it. Rather, the amount over $17,000 is counted against your lifetime gift tax exemption, which is tied to the estate tax exemption.
The lifetime gift tax limit is $12.92 million, as of 2023. If you exceed that lifetime limit in gifts given - again, minus the $17,000 exemption per gift recipient, per year - you’ll owe the gift tax. In the meantime, if you give a gift of more than $17,000, you need to report it to the IRS. This is so it can be counted against your lifetime exemption.
Gift Tax Rates
Let’s say you’ve reached your lifetime gift tax exemption, and then you give another gift that exceeds the annual exclusion. Now you’ll actually have to pay the federal gift tax. Like many taxes, the gift tax is charged at progressive rates. The following chart shows what you can expect to pay:
Gift Tax Rates for 2023 | |
Value of Gift in Excess of Annual Exclusion | Tax Rate |
$10,000 or less | 18% |
$10,001 to $20,000 | 20% |
$20,001 to $40,000 | 22% |
$40,001 to $60,000 | 24% |
$60,001 to $80,000 | 26% |
$80,001 to $100,000 | 28% |
$100,001 to $150,000 | 30% |
$150,001 to $250,000 | 32% |
$250,001 to $500,000 | 34% |
$500,001 to $750,000 | 37% |
$750,001 to $1 million | 39% |
More than $1 million | 40% |
If you give a gift that qualifies for the gift tax, you’ll file a form with the IRS as part of your tax return and whatever you owe will be calculated there. Remember, it’s the person who gives the gift who must file and pay the tax, not the person who receives the gift.
Bottom Line
The federal gift tax is levied on large gifts, but there are many exclusions that lead to most people never having to worry about it. First, there’s a yearly exemption of $17,000 per person, so you can give that much to an unlimited number of people every year without worry. Even if you give a gift that exceeds that, though, you likely won’t owe the gift tax as every person has a lifetime exemption. Unless you give more than $12.92 million exemption in 2023 (minus the yearly exclusions) over the course of your life, you’ll never have to pay the gift tax. If you do end up having to pay the gift tax, there is a graduated rate of brackets that determine how much you pay.
Tips for Paying Taxes
- Whether it's the gift tax or planning for retirement, a financial advisor can help. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Income taxes are something that nearly all Americans have to consider. Use SmartAsset’s free income tax calculator to see what you might owe the federal government each year.
Photo credit: iStock.com/fizkes, iStock.com/SDI-Productions
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