Understanding Gift Taxes: Who Has to Pay and When?
Who pays the taxes on a gift? Learn more about when a gift is taxable, who’s responsible for filing a gift tax return, and what exclusions apply.
Hey, big spenders! If you’re giving expensive gifts to someone, you might need to get acquainted with the Internal Revenue Service’s Form 709, the “United States Gift (and Generation-Skipping Transfer) Tax Return.” Yes, it’s the gift-giver who pays taxes on a gift.
But unless that gift-giver has a habit of doling out big-ticket gifts, they generally won’t have to pay a gift tax, thanks to annual and lifetime gift tax exclusions.
Who pays the taxes on a gift?
In a FAQ page about gift taxes, the Internal Revenue Service (IRS) says that it’s usually the donor who’s responsible for paying the gift taxes, although the donee “may agree to pay the tax instead” under special arrangements.
TaxAct reports for USA Today that the IRS may collect the gift tax from the donee if the donor doesn’t pay. But the company also notes that most donors who are giving gifts large enough to trigger a gift tax can afford to pay the tax bill on those gifts.
What does the IRS consider a gift, and what gifts are excluded from taxes?
The IRS 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.”
That said, the IRS lists gifts that are generally not taxable: gifts that do not exceed the annual exclusion for the calendar year, gifts that pay the tuition or medical expenses for someone else, gifts you give to your spouse, and gifts to a political organization for its use.
What is the annual gift tax exclusion?
The annual exclusion for gifts is $15,000 for 2021 and $16,000 for 2022, the IRS says. That means you can give up to $15,000 in gifts to someone in 2021 or $16,000 in gifts in 2022 and generally avoid needing to file a gift tax return.
And the annual exclusion is for each donee, so you could have given $15,000 to each of your children last year without having to file a gift tax return. The exclusion is also per individual giver, meaning the gift tax annual exclusion rises to $32,000 for married couples in 2022.
What is the lifetime gift tax exclusion?
Gift values that remain after the annual exclusion count toward the lifetime gift tax exclusion, which is $11.7 million in 2021 and double that for married couples, according to Nerdwallet. As the website points out, a taxpayer giving someone a $50,000 gift in 2021 will use up the annual exclusion for that recipient and will have to file a gift tax return. But if the remaining $35,000 doesn’t exceed the taxpayer’s lifetime exclusion, they generally won’t have to pay a gift tax on that amount.
When conceptualizing lifetime gift tax exclusions, taxpayers can “think about buckets or cups,” as Christopher Picciurro, a certified public accountant and co-founder of Integrated Financial Group in Michigan, tells Nerdwallet. The amount that doesn’t fit in the annual gift tax exclusion bucket “spills over” into the lifetime gift tax exclusion bucket, Picciurro explains.
For more information, consult a tax professional or refer to the IRS’ instructions for Form 709.