Gifting money this year? Here’s how it may be taxed


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What is a Gift Tax?

It is a federal tax imposed on certain transfers of any assets made as gifts without expecting anything in return. In 1924, the gift tax was first introduced to prevent people from avoiding estate taxes by giving away their assets before they died. It has since undergone several changes, including a significant overhaul in 2017 with the passage of the Tax Cuts and Jobs Act.


This is imposed on the donor and not on the recipient to regulate the tax avoidance by people. Moreover, it avoids excessive gift-giving of assets to beneficiaries to get away from paying taxes. However, the receiver should keep in mind that when the gift starts to generate income, they will be responsible for paying taxes on it.

Exclusion from the Gift Tax

According to the IRS website, the gift tax does not apply to the following types of gifts:

  • Transfers to a spouse in any amount if they are a US Citizen, and a limit of $164,000 for 2022 if they are non-citizens (except for gifts of property that are not marital property);
  • Gifts to a political organization;
  • Charitable contributions;
  • Medical expenses which are paid directly to the institution;
  • Tuition payments which are made directly to educational institutions; and
  • Gifts that do not exceed the prescribed Annual Gift Tax Limit.

The gift tax will apply when the donor exceeds the annual exclusion limit with gifts to one recipient. The taxable amount is calculated on a cumulative basis where the total value of all gifts made in a year is added up, and the tax is paid on the total amount.


Gift Tax Exclusion

There are two ways to keep the IRS from imposing taxes on gifts given by individuals to their beneficiaries.

Annual Gift Tax Limit for 2022

For the tax year 2022, the annual gift tax exclusion is $16,000 per recipient. That means you can give up to $16,000 to as many people as you want during the year and owe no gift tax on those transfers. You can also split gifts with your spouse. This doubles your exclusion to $32,000 per recipient. However, keep in mind that the $16,000 limit applies to each recipient, not to each gift. So, if you give two gifts of $10,000 each to one person, only $16,000 of the total will be excluded from gift tax.

Lifetime Gift Tax Exemption

Another way to be excluded from the gift tax is through the lifetime gift tax exemption, which is the total amount you can give away without owing any gift tax. For the tax year 2022, the lifetime gift tax exemption is $12.06 million per person. That means you can give up to $12.06 million without owing any gift tax. This exemption is per person, not per gift. So, if you give away two gifts of $5.79 million each, you will still be within your lifetime exemption.

Gift Tax Rate for 2022

If you managed to use up all of your exclusions, you might indeed have to pay the gift tax. The taxes imposed for gifts above the annual gift tax limit varies between 18% to 40%. Below is a table of the breakdown of the gift tax rate for the taxable amount exceeding the annual exclusion Limit of $16,000 per gift for 2022.

Gift tax rates

The Bottom Line

The gift tax can be a complex topic, but the main takeaways are as follows: The annual gift tax exclusion for 2022 is $16,000 per recipient. You can give up to $16,000 to as many people as you want and owe no gift tax on those transfers. You can also split gifts with your spouse. This doubles your exclusion to $32,000 per recipient. The lifetime gift tax exemption is the total amount you can give away without owing any gift tax. For the tax year 2022, the lifetime gift tax exemption is $12.06 million per person. If you managed to use up all of your exclusions, you might have to pay the gift tax. The rate of taxes imposed for gifts over the annual gift tax limit varies between 18% to 40%.


What is the gift tax limit for 2022? 


The gift tax limit for 2022 is $16,000 per recipient. This means you can give up to $16,000 to as many people as you want and owe no gift tax on those transfers.


How much is the lifetime gift tax exemption for 2022? 


In 2022, the lifetime gift tax exemption went up to $12.06 million per person. This means you can give up to $12.06 million in your lifetime without owing any gift tax.


 What is the gift tax rate for 2022? 


The gift tax rate for 2022 is 18%-40%. This means that any taxable amount exceeding the annual exclusion limit of $16,000 per gift will be taxed at 18%-40%. Refer to the table above for the specific tax rate at each gift amount in excess of $16,000.


What is the “Fair Market Value” of gifts?


According to the IRS website, Fair Market Value is defined as: “The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent’s gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.”


Are there any exemptions to the gift tax? 


Yes, there are several exemptions to the gift tax. The most common exemptions are gifts made to your spouse, gifts made to a charity, and gifts that are not above the annual exclusion amount.


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