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Money and a gift

What is the gift tax and how does it affect you?

by Jonathan Dougherty | Contributor
June 20, 2022

It seems as if the government taxes everything these days. But is a gift between family members really subject to federal taxes?

We spend most of our lives building our assets to pass them along to our children and grandchildren. We work hard so our family can have a secure financial future.

But life is to be enjoyed. And few things make us feel happier than giving the right gift at the right time. Grandparents give graduation and birthday gifts. A parent might want to give their adult children a monetary gift to help them get established as they venture out on their own. What if you're going to provide a down payment on a house? Or the money for a new car?

Is the federal government going to subject your gift giving to federal gift tax laws?

The answer is - yes.

But if you understand the tax rules and how they are applied, there is a high chance you will not pay any gift taxes at all.

What is a gift?

Today, giving away certain items to your loved ones is common in most families and makes sense. Some gifts bring them immediate joy. And other gifts can improve their lifestyle right now while you are here to enjoy it with them. Some gifts are needed now, not later, like baby gifts.

You get to feel the excitement of gift giving and see the appreciation.

But what is a gift for tax purposes?

For tax purposes, the federal government considers a gift any transfer of money or property to other people if you get nothing, or less than full value, in return.

This inclusive definition includes almost any gift you give or can imagine.

And the gift tax obligation is on the gift giver, called the donor, and not on the recipient.

Yet, most people will not need to pay any gift tax, and here is why.

Gift tax exemptions - annual and lifetime

The federal government has gift tax exemptions. If you stay under the exemption thresholds, you will owe no gift tax at all.

But if you do not stay under the thresholds, the gift tax rates range from 18% to 40%, and the gift giver usually pays the tax. The details and rate are outlined in instructions to IRS Form 709.

The two exemptions are an annual exemption and a lifetime exemption.

The annual exemption is easy to understand and use. The lifetime exemption is slightly more complicated. It is linked with the exemption allowed for federal estate taxes into a unified credit.

Annual exemption

The annual exemption allows you to give a certain amount in gifts to a person annually before any gift taxes are due. As of 2022, you can give up to $16,000 in a single year to one person without incurring a taxable gift. This amount is up from the $15,000 allowed in 2021.

This may not seem like a large amount, but you can give away quite a bit when used correctly.

Assume you and your spouse have three children. Each year, you can give the annual exemption to each of the children without incurring any gift taxes. And your spouse can give the same amount. So, in 2022 each of the children could receive $32,000 in value without any tax obligation to anyone.

Although the annual exemption increases from time to time, the amount of money, stock or other gifts you can give can be quite large. At the 2022 level, if you and your spouse gave the maximum amount to each child of $32,000, you would have transferred $96,000 from you to your children tax-free.

If you did that for 21 years, you would be able to transfer $2,016,000 worth of assets out of your estate to your children or even trusts for your children with no gift tax and no estate tax.

This is a powerful estate planning tool if you give gifts that appreciate in value over time, like stocks, real estate or collectibles. With the ability to transfer them to your children while you are alive, any appreciation is already removed from your estate. And it is possible to do so and still keep control of the asset for their benefit.

If you keep your gifts below the annual exemptions, the recipient typically owes no taxes. And they don't have to report the gift unless it comes from a foreign source.

But suppose your gift exceeds the exclusionary amount, currently $16,000, to any person during the year. In that case, you must report it on a gift tax return (IRS Form 709). Also, if you and your spouse split the gift, you must file Form 709, even if no taxable gift tax is incurred.

And once you give more than the allowable annual gift tax exclusion, you start to use up your lifetime gift and estate tax exemption.

Lifetime gift exclusion

The IRS allows a lifetime gift exclusion. You are entitled to give away up to the lifetime gift exclusion amount without paying any gift tax.

And this is separate from the amounts you give away tax-free annually because they are under the annual gift tax exclusion amount. Your annual gift giving does not eat into your lifetime exclusion until you exceed that annual exclusionary amount.

For example, if you gave someone a $20,000 gift this year, $16,000 of it would have no tax obligation because of the annual exclusion. The remaining $4,000 would be deducted from your lifetime exclusionary amount.

But you don't pay taxes on that amount this year. You don't pay any gift taxes until you exceed the lifetime exclusionary amount.

The lifetime exclusion total is for gift and estate taxes

The IRS gives an exclusionary amount for the combined dollar amount of gifts given away and the value of your estate.

The total amount is a whopping $12.06 million for 2022. This is the amount you can give away over your lifetime tax-free. For couples, the amount is $24.12 million.

But you must not forget that the lifetime gift tax exclusion is shared with the estate tax exclusion.

The more money you give away above the annual gift exclusion, the less money you can leave to your heirs tax-free when you die.

For example, assume that you gave away up to the annual gift exclusion this year. Then you gave away $12.06 million. You have no gift tax obligation because you did not exceed the lifetime threshold. But now your estate has no amount of the unified credit available and will start paying taxes from dollar one.

Or assume that you never gave away any amount above the annual gift exclusion during your lifetime. Your estate will have the total lifetime exemption amount available, $12.06 million as of 2022. If you died today and never used any of the unified credit for gift taxes, the first $12.06 million of your estate would be tax-free.

How much of the unified credit you choose to use for gift tax or estate tax exclusions is up to you. But the lifetime amount is for both of them combined.

But the exemption is scheduled to be cut in half

But beware of the current legislation as you plan your future gift and estate strategies.

Because of ffederal law, the current $12.06 million exemption is temporary and only applies up to the 2025 tax year.

Initially, the estate tax exemption was set at $5 million in 2011, adjusted for inflation.

In 2017 the Tax Cuts and Jobs Act doubled that exemption for 2018-25, with inflation adjustments. The exemption was $11.7 million in 2021 and increased to $12.06 million for 2022.

$100 dollar bills wrapped with a bow

The law will reduce the exclusion for estates by restoring the exemption to pre-TCJA levels by the 2025 tax year.

Unless Congress acts, and this is always a big if, the estate exemption and, therefore, the unified credit will be cut in half and back to its $5 million value, adjusted for inflation.

Most Americans will not be affected by the reductions. Even with the reduced gift and estate exemptions, they will still be able to gift and bequeath their assets relatively tax-free to their family and heirs.

But there are opportunities and strategies to discuss with your financial advisor for those with assets and income high enough.

Suppose you believe the higher exemptions will sunset. Is there anything you can do right now to lock in the $12.06 million exemption while it still exists? And if you did use those higher exemptions, how will the IRS tax you after the exemptions are reduced.

A straightforward strategy is to gift higher amounts before the exemption is reduced if you can afford to do so. You get to see your loved ones enjoy and take possession of the large gifts, and you pay no gift taxes currently.

What can you do today to take advantage?

For example, assume you left your adult child $10 million today. And then you pass away in 2026 after the exemptions are reduced back to around $6 million. Will your estate be penalized?

Fortunately, the IRS has already answered that question, and the answer is no. According to the IRS, making large gifts will not harm your estate after 2025.

In November 2019, the IRS stated that individuals who took advantage of the increased gift tax exclusion amount in effect from 2018 to 2025 “will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.”

And the IRS is unambiguous about whether or not the exemption will be reduced, as opposed to new legislation to allow it to continue.

The IRS states the increase is only temporary and that in 2026 basic exclusion amount (BEA) will be the law again. Thus, in 2026, the BEA is due to "revert to its pre-2018 level of $5 million," adjusted for inflation. But you will not be penalized then if you take advantage of the existing exemptions.

How to avoid owing gift tax

Because of the exemptions and unified credit, most Americans will not owe any gift or estate taxes. But to ensure you pay no gift taxes, or the minimum possible, you should discuss the best strategies with your financial planners. Some of the more popular ones are:

  • If you are a couple, always consider gift splitting. In 2022, this allows you to give $32,000 per recipient and still stay below the threshold. Remember, when gift splitting, you must file IRS Form 709 even when no gift tax is due.
  • Find a proper way to pay bills directly instead of gifting the money. This is especially common with medical and educational bills.
  • Spread out the gifts. Instead of giving an entire piece of real estate, you can place the real estate in an LLC and give away a percentage of the membership each year. Be sure not to go over the yearly exclusionary amount.
  • Factor in the size of your estate and your estate plan and determine how much you can gift and still have a tax-free estate.
  • Talk with your financial professional to learn how you can distribute your assets in ways that won't trigger the gift tax. Large and complex businesses and assets can often be gifted in parts that will not generate gift tax obligations.


Many Americans will not pay gift tax because of the annual exclusions and lifetime exemptions.

However, because the IRS rules, you can use the current gift tax regulations to help transfer assets out of your estate during your lifetime tax-free.

And while the unified credit is currently $12.06 million for gifts and estates combined, that amount will be reduced by half in the next few years.

If you act now, you may be able to take advantage of the current exemptions today, with no IRS penalty in the future. Luckily the IRS has already ruled on this scenario in advance.

In addition to taking advantage of current exemption and tax advantages, few things in life compare the joy of giving gifts to your family members.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at

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