Are Gifts Subject to Tax?

Many taxpayers are curious about whether gifting cash, property, or assets triggers any tax obligations. The answer is generally no; however, there are certain limits and exceptions to consider.

For most individuals, the IRS allows them to gift assets or property without triggering taxes, provided they stay within specific limits. In 2024, the annual gift tax exclusion is set at $18,000. This means you can gift up to $18,000 to any individual tax-free each year. What’s more, this amount is not limited to a single recipient, meaning you can give up to $18,000 to multiple people, such as your children, grandchildren, or other loved ones.

In addition, there is a lifetime exemption for gift and estate taxes. For 2024, this exemption is $13.61 million, which allows individuals to make larger gifts without incurring tax obligations as long as the total cumulative amount remains within the exemption.

Common Complications

Although gifting might seem straightforward, a few complications can arise:

• Present vs. Future Interest: Only gifts with a “present interest” qualify for the gift tax exclusion. A gift is considered present interest if the recipient has an immediate right to use, possess, and enjoy the gift. Gifts that are classified as “future interest” do not qualify for the annual exclusion. However, there are exceptions—such as gifts to minors—that may still qualify if they are structured in a way that the recipient will have access to the gift by age 21. Additionally, a Crummey trust can help structure future-interest gifts for minors while still qualifying for the exclusion.

• Exceeding the Annual Limit: If a donor gifts more than $18,000 to a single recipient, the excess will reduce their lifetime gift and estate tax exemption. For instance, if a donor gifts $25,000 to each of their children, they would reduce their lifetime exemption by $7,000 for each gift.

• Gifting Assets Instead of Cash: Donors can gift assets rather than cash, but this may lead to capital gains tax implications for the recipient. If the gifted asset has appreciated, the recipient will need to account for capital gains taxes based on the donor’s original purchase price. On the other hand, if the asset is sold at a loss, the recipient cannot recognize the loss. In some cases, it may be more beneficial for the donor to sell the asset, realize the loss, and then gift the proceeds.

• Tuition and Medical Expenses: Gifts that are made directly to educational institutions for tuition or to medical service providers for medical expenses are not subject to gift tax rules. However, costs such as room and board or books are not exempt and would count against the annual exclusion.

• Gift Splitting for Married Couples: Married couples can combine their exclusions by electing “gift splitting.” This allows each spouse to gift $18,000 (or $36,000 together) to a recipient without incurring taxes. There are some conditions for this:

  • Both spouses must be U.S. citizens or residents in the year the gift is made.
  • Both must agree to gift splitting, and it must be elected via IRS Form 709, which needs to be filed annually.
  • All gifts made by either spouse in the year the election is made will be treated as if both spouses made them.
  • Gifts to the other spouse are not eligible for this treatment.

When Taxes May Apply

If a gift exceeds the annual exclusion, the donor—not the recipient—typically bears the gift tax liability, unless they agree otherwise.

IRS Form 709

To track gifts that exceed the exclusion, the IRS requires donors to file Form 709, the gift tax return. This form must be submitted by the April 15th tax filing deadline, although extensions can be requested. Form 709 helps the IRS keep track of how much of a donor’s lifetime exemption has been used. When assets other than cash are gifted, they must be assigned a value, typically using the fair market value on the date of the gift. A qualified appraisal might be needed in some cases.

Other Considerations

In community property states, gifts made from assets considered joint property are usually split equally between spouses, simplifying the gift tax calculation. Each spouse can apply their gift exclusion without needing to file Form 709.

For gifts from nonresidents or foreign estates, IRS Form 3520 is required. Certain tax obligations may arise in these cases. Additionally, U.S. expatriates who are “covered expatriates” may face additional taxes when gifting to U.S. citizens or residents, including a special expatriate transfer tax that requires the recipient to pay taxes on the gift.

Before making significant gifts, it’s wise to consult a tax professional to ensure compliance and avoid unexpected tax liabilities.