Gift Tax: When a Gift May be Taxing. By Austin Estate Planning Attorney Zachary D Kamykowski

giving a gift can be tricky

It is better to give than to receive. But if you give a gift above a certain amount, you might owe money to the Internal Revenue Service (IRS). You don't want to taint the joy of giving a present, by unintentionally having to pay tax on that show of goodwill. As an estate planning attorney in Austin, I can help you navigate your gifting strategy smoothly.

The IRS has particular rules about how much you may transfer to others each year—and throughout your lifetime—in the form of a gift. Any contributions above that amount may be subject to gift tax, paid by the giver. However, not every present is subject to the gift tax. Annual exclusion amounts, a lifetime exemption amount, and other exclusions, such as education or medical exclusions, relieve a giver of also owing additional funds to the federal government. Because the lifetime exemption amount is very generous at this time, many people will not owe taxes on their gifts. However, high net worth individuals should be mindful of how gifting can affect the estate tax that may be due upon their death.

What does the IRS Consider a Gift?

According to the IRS, a gift is a transfer of money, property, or other assets, such as real estate or stock, for which the giver does not receive “full consideration.”^[1] Consideration is a contractual term that means “exchange value.” Full consideration, as the IRS defines it, is fair market value. The fair market value of a property such as real estate is the price that a buyer and seller, both having proper knowledge about the property and under no pressure to trade, would agree to on the open market.

The IRS will consider any exchange a gift and subject to gift tax, with the following limited exceptions:

• Tuition or medical expenses paid on behalf of another person (education exclusion and medical exclusion)
• Contributions to a political organization
• Giving to your spouse (unlimited amounts between spouses without IRS involvement, assuming both spouses are US citizens)
• Donations to qualified charities
• Gifts that do not exceed the annual exclusion amount ($16,000 in 2022) to any individual recipient in any given year

What Else Should I Know about the Gift Tax?

When giving a gift to another person, here are some other tax-related points to keep in mind:

The giver customarily pays the gift tax

The IRS regulations refer to the giver as the donor and the receiver as the donee. The donee can agree to pay the gift tax instead of the donor. In cases where the donor owes and does not pay it, the IRS could seize the gift or otherwise turn to the donee for tax payment, but this usually only happens if the donor has passed. In this case, the IRS advises that the donee should discuss the payment with a tax professional.

The annual gift tax exclusion is per recipient

You can gift up to $16,000 per person to an unlimited number of individuals in any given taxable year without triggering the gift tax. The IRS regulations calculate the $16,000 annual gift tax exclusion per recipient. For gifts given by a married couple, the annual exclusion amount is $32,000 (twice the individual exclusion).

There is a federal gift tax form

Gifts that exceed the annual exclusion amount could be subject to tax, depending on whether you have used up your lifetime exemption (see below). If your gift exceeds the annual exclusion amount or applies the annual exclusion to a transfer in trust, you must file Form 709 even if no gift tax is due.

How Does the Lifetime Exemption Work for Gift Taxes?

In addition to the annual exclusion, there is also a basic exclusion amount known as the lifetime exemption. The lifetime exemption is the amount you can give across all years before you owe the government. For 2022, the lifetime exemption is $12.06 million.

Notably, the lifetime gift exemption works alongside the estate exemption. The IRS treats the two exemptions as a single amount ($12.06 million in 2022, but subject to change in future years). Thus, the amount of non-excluded gifts they give counts against their lifetime exemption throughout a taxpayer's life and could also affect their estate tax.

For example, let us say that a taxpayer has gifted $2 million over their total annual exclusions by the time they pass away in 2022. That amount counts against their lifetime exemption, reducing the balance to $10.06 million. If their estate’s value exceeds $10.06 million, estate taxes would be due on the excess amount.

It is unlikely that most individuals will exceed the lifetime exemption. And even if they do, the tax is graduated (i.e., the tax increases in proportion to the taxable amount). Overall, the gift tax rate ranges from 18 percent for taxable amounts up to $10,000 to 40 percent for taxable payments over $1 million.

Give Yourself the Gift of an Estate Planning Professional

Generosity is its own reward. But you owe it to yourself to make sure that you correctly report your generous contributions, you file the proper IRS forms, and that your giving fits your overall estate planning goals. An estate planning attorney can help you understand the tax implications of giving, including the long-term estate tax implications and some of the hidden costs of a gift, such as real estate taxes, transfer fees, or capital gains tax.

Contact our office to schedule an appointment for guidance regarding lifetime giving, estate taxes, and estate planning.

^[1] Frequently Asked Questions on Gift Taxes, IRS.gov, https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes (Nov. 15, 2021).

See this IRS resource for answers to common questions about these issues, see this IRS resource: https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes