Updated for 2023.
If you give away generous sums of money to a friend or family member, you may be required to pay a gift tax to the IRS. However, with a bit of planning, you can afford to be quite generous before you must break out Form 709 to report the amount and be on the line to pay extra money.
Here are three easy ways to steer clear of the gift tax.
At a glance:
To avoid the gift tax, give up to the annual exclusion amount ($17,000 in 2023) to any one person in a tax year.
Being married doubles your giving power.
Consider spreading large gifts over multiple years to stay within the limit.
1. Double (or quadruple) your limit.
The key to avoiding paying a gift tax is giving no more than the annual exclusion amount to any person in a given tax year. For 2023, that amount is $17,000 (up from $16,000 in 2022). This means if you want to give ten people $17,000 each in one year, the IRS won’t care. However, if you give $18,000 to just one person, you must file a gift tax return.
The annual exclusion amount does rise periodically due to inflation, so it’s important to double-check the amount each tax year to ensure you don’t give over the limit.
Being married is an easy way to double your giving power, as both you and your spouse are entitled to the annual exclusion amount on a gift. As long as the gift is given from joint property, the IRS considers the gift to be half from each. Therefore, you and your spouse can give $34,000 total.
The same rule applies when you give to someone who is married. You can give an additional gift of up to $17,000 to the recipient’s spouse, making the annual limit from one couple to another $68,000 ($17,000 x 4 = $68,000).
2. Pay medical bills or tuition directly.
While giving a $50,000 check to a grandson heading off for college might seem the same as writing the check directly to the college, to the IRS, it’s very different. A check written to a college for tuition does not count as a gift for purposes of the gift tax. However, a check written to your grandson, regardless of what he does with it, is considered a monetary gift.
The same is true for medical bills. If you pay the money directly to the medical institution, it’s not considered a gift.
If you’d like to help a family member with college or medical expenses, paying the institution directly may be best to avoid extra taxes.
3. Spread the gift out between years.
If you’re tempted to give a large gift for the holidays, consider splitting the gift into two checks instead. For example, if you want to give your single adult son $20,000, first write him a check for no more than $17,000. Then, wait until the new year to give him the remaining amount.
What if you’ve already given more than the annual gift tax limit?
Don’t worry; filing a gift tax return is not difficult, and in some cases, you may not owe any tax yet.
The dollar amount exceeding the annual limit ($17,000) is added up throughout your lifetime. Anything that exceeds the yearly exclusion counts toward the lifetime exclusion. Yep, there’s a lifetime exclusion, too.
You don’t actually owe any tax on gifts over the annual exclusion until you exceed your lifetime limit. For 2023, the lifetime limit is $12.92 million per person. For most of us, that means we’re in the clear.
Want to run some numbers? Check out our handy gift tax calculator to help you determine if you’ll owe any gift tax this year.
This article is for informational purposes only and not legal or financial advice.
More to explore:
5 Misconceptions about the Child Tax Credit Monthly Payments
The perfect gift to give when you have zero dollars to spend
File an Income Tax Extension for Free
Gift Tax: The Tax Implications of Supporting Adult Children
Why Is My Tax Refund Smaller This Year?
– Tax Tips and Tax Planning Resources | TaxAct Blog