This is a popular time of year for giving gifts. But are there taxes on gifts?
First, the gift recipient never pays tax, on any gift, of any size.
But does the gift giver pay taxes? Still no, but there are some things to keep in mind. Two numbers are important here: the annual gift exclusion, and the lifetime gift tax exemption.
Every person can give every other person (relative, friend, coworker, anyone) a certain amount of money each year without any further action required: this is the annual gift exclusion. For 2024, that amount is $18,000. And for 2025, it's $19,000. This rule covers the majority of gifting that occurs, and nothing else is necessary. For anything else, keep reading:
If a gift larger than the annual exclusion is made, records need to be kept by the gift giver to keep track of those amounts. These become known as lifetime gifts, and the total of these will eventually be considered when a person passes away and their estate is administered. If those lifetime gifts exceed the lifetime gift tax exemption, the estate would pay more tax. The 2024 exemption is $13.61 million per person, and the 2025 exemption will be $13.99 million. These are very high exemptions and it means that the number of taxpayers whose estates would actually be subject to the tax is extremely small. So let's focus on that recordkeeping requirement, using a common example: parents helping adult children buy their first home.
Mickey and Minnie are so happy to hear that their son Spongebob is going to buy a home with his new husband Patrick. They would like to help! They are very generous and would like to give them $100,000 towards the down payment. What needs to happen?
First, we determine the amount that can be excluded: $18,000 x 4 = $72,000. Technically, 4 gifts are being given: $18,000 each from Mickey to Spongebob and Patrick, and $18,000 each from Minnie to Spongebob and Patrick.
This means Mickey and Minnie will each have a $14,000 lifetime gift that counts against their lifetime exemption.
Mickey and Minnie are married and file their taxes jointly, and they will each have to file a gift tax return (Form 709) to keep track of their respective gifts. Spongebob and Patrick have no requirements to report anything.
Since we're talking about a home purchase though, and Spongebob and Patrick will be getting a mortgage, their lender will probably request a gift letter. Generally, as you're applying for a mortgage, a lender will look at the past few months' of bank statements. Large deposits like the gifts from Mickey and Minnie will raise a red flag, and the bank will want to know that these are gifts, not loans. So, while this isn't quite related to the question of taxes, it is something that happens quite a lot. It's just a statement from Mickey and Minnie that the money was a gift and they're not expecting it to be paid back.
So there you have it: most of us will never pay the gift tax. Still, everyone should be familiar with the exclusion and exemption amounts, and when a gift tax form needs to be filed.
Some other things to keep in mind:
The lifetime exemption increased a lot with the Tax Cuts and Jobs Act in 2017. Those provisions are set to expire at the end of 2025 unless extended by the new Congress. The exemption was still quite high prior to the new law, though, so it's still unlikely that many estates would be subject to the tax
In general, it's best practice to write separate checks or make separate electronic transfers for each gift, just for ease of recordkeeping
It's also best practice to make sure checks are deposited by 12/31
If a large gift is being made near year-end, consider making some of the gift in the new year, when there will be another exclusion available
These are the rules governing gifts to people. Contributions to charitable organizations have their own rules.
There are even exclusions to the exclusion! Paying someone's tuition or medical expenses doesn't count as a gift at all, and no reporting is necessary. Those payments must be made directly to the institution.
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