If you transfer money or property to another person, you may need to pay a gift tax to the IRS. A gift tax refers to an IRS tax on property and/or money transactions from person to person where the giver receives less than full value in return.
Keep in mind tax can apply whether the transfer is considered a gift or not. For example, if you sell an item for less than its total value or make a loan with reduced or no interest, the IRS may consider the transaction to be a gift.
What Does the IRS Consider as Gifts?
The IRS considers a gift to be any transfer with monetary value to another person where nothing or less than the transfer’s value is received in return. The transfer can be either directly or indirectly.
Usually, the IRS is not involved unless the gift exceeds a given value. Even if the gift does not exceed this value, you might need to complete extra paperwork.
Are Any Gifts Excluded from the IRS Gift Tax?
Technically, any gift is taxable, but there are several exceptions. The following are some of the gifts excluded from the IRS gift tax:
- A gift that does not exceed the annual gift tax exclusion for the calendar year ($16,000 in 2022)
- A gift to a spouse
- A gift to a political organization for disclosed use
- Medical expenses or educational money that you pay for another person
Moreover, some gifts to eligible charities are deducted from the value of the gift you are making.
How Much Is the IRS Gift Limit?
In 2021, the annual gift limit was $15,000 per recipient, and for 2022 it is $16,000 per recipient. This implies you are free to give up to $16,000 to as many recipients as you want in 2022 without worrying about the IRS gift tax.
This is because the gift tax limit is not a cap on the total sum of your gifts to a single person for the given year.
If you do not gift a single recipient more than $16,000 within the year, you will not pay a gift tax.
What Is the IRS Gift Tax Rate?
As mentioned earlier, if you gift beyond the provided gift tax exclusion limit to a single individual within the year, you must disclose the gifts to IRS. This means you pay gift taxes.
Gift tax rates range from as low as 18% to as high as 40% depending on the gift.
Who Pays the IRS Gift Tax?
The person giving the gift must pay the gift tax. However, the IRS provides special arrangements and programs that allow recipients to pay the gift tax instead. If you are considering this alternate gift tax scenario, it is best to first consult with a tax professional.
What Is the Annual IRS Gift Tax Exclusion Amount?
The annual IRS gift tax exclusion amount is simply another way of referring to the IRS gift limit. As noted, in 2021, you could gift up to $15,000 in a year to another person without having to pay gift tax.
In 2022, the gift tax exclusion is raised slightly to $16,000. If you transfer to another person more than $16,000 in cash or assets such as a new car, stocks, or land or other property in 2022, you must file a gift tax return.
Is There a Lifetime IRS Gift Tax Exclusion Amount?
There is also a lifetime gift tax exclusion amount of $11.58 million in 2020, $11.7 million for 2021, and $12.06 million in 2022. It is critical that you understand timing if using an estate tax exemption.
Can a Gift Be Deducted on IRS Tax Returns?
Making a gift generally does not affect your federal income tax. This means you won’t be able to deduct a gift’s value on your IRS tax return unless the gifts qualify as a deductible charitable contribution.
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