Updated for tax year 2023.
Surprise — Mom and Dad gave you a nice check! Maybe it’s enough for dinner, or maybe it’s something more substantial.
Either way … are there any tax implications for receiving such a gift?
At a glance:
The gift giver pays any gift tax owed, not the receiver.
You don’t have to report gifts to the IRS unless the amount exceeds $17,000 in 2023.
Any gifts exceeding $17,000 in a year must be reported and contribute to your lifetime exclusion amount.
You can gift up to $12.92 million over your lifetime without paying taxes on the gift (as of 2023).
The IRS adjusts the annual exclusion and lifetime exclusion amounts every so often.
How much is the annual gift tax for 2023?
First, let us put your mind at ease. The total gift amount must be quite substantial before the IRS even takes notice.
For tax year 2023, if the value of the gift is $17,000 or less in a calendar year, it doesn’t even count. The IRS calls this amount the annual gift tax exclusion.
If a married couple makes a gift from joint property, they can each gift up to the annual exclusion. This means Mom and Dad could give you $34,000 in 2022 without worrying about paying any gift tax.
This tax exists to prevent people from giving away their money to avoid paying their income taxes. The gift tax rate fluctuates from 18-40%, depending on the size of the gift.
For instance, if you give someone a gift worth between $20,000 and $40,000, the marginal gift tax rate is 22%. But if you give someone a gift valued between $750,001 and $1,000,000, the marginal gift tax rate would be 39%.
Do I have to pay taxes on a gift?
All gifts can be taxable, but there are many exceptions.
As the recipient of the gift, you generally do not have to pay the gift tax. The person who does the gifting will be the one who files the gift tax return, if necessary, and pay any tax due.
If the donor does not pay the tax, the IRS may collect it from you. However, most donors who can afford to make gifts large enough to be subject to gift taxes can also afford to pay the tax on the gifts.
Do I have to report gifted money as income?
Any gift may be taxable, but the recipient of the gift does not have to pay taxes. The person who gives you the gift needs to file a gift tax return if it’s more than the $17,000 annual exclusion.
How much can you gift without paying income taxes?
In 2023, you can gift up to $17,000 per person without the gift contributing to your lifetime exclusion of $12.92 million (up from $12.06 million in 2022).
Each year, the IRS keeps track of any gifts that exceed the annual gift exclusion amount. Your excess gift amount accumulates until it reaches the lifetime gift tax exclusion.
This lifetime gift exemption allows the gift giver to give more than the annual exclusion. They will need to file a gift tax return for any gifts exceeding the $17,000 annual exclusion, but they will not need to pay gift tax until they have given away over $12.92 million in their lifetime.
Do I need to report a gift on my taxes?
If you receive a gift, you do not need to report it on your taxes. According to the IRS, a gift occurs when you give property (like money) without expecting anything in return.
If you gift someone more than the annual gift tax exclusion amount ($17,000 in 2022), the giver must file Form 709 (a gift tax return). However, that still doesn’t mean they owe gift tax.
Do I have to pay taxes on a $20,000 gift?
You do not need to file a gift tax return or pay gift taxes if your gift is under the annual exclusion amount per person ($17,000 in 2023). If you do exceed that amount, you don’t necessarily need to pay taxes.
This is where the lifetime exclusion comes in — each gift you give contributes to your lifetime exclusion amount, but unless your gifts exceed the lifetime limit, you do not need to pay gift taxes, even when you are required to file a gift tax return.
For example, say someone gives you $20,000 in 2023. The giver must file a gift tax return showing an excess gift of $3,000 ($20,000 – $17,000 exclusion = $3,000). Your total gift amount will also be added to your lifetime exemption.
Gifts not subject to the gift tax
Some transfers of money are never considered taxable gifts. These kinds of transfers are tax-free, no matter the amount.
For purposes of the gift tax, it’s not a gift if:
It’s given to a husband or wife who is a U.S. citizen. Special rules apply to spouses who are not U.S. citizens.
It’s paid directly to an educational or medical institution for someone’s medical expenses or tuition expenses.
What about estate taxes and inheritance taxes?
Many people also have questions about estate and inheritance taxes when discussing the gift tax. While often grouped together, these are actually two different types of tax:
Inheritance tax: This is the tax a beneficiary must pay when inheriting assets from someone who died. There is no federal inheritance tax, but as of tax year 2023, six states impose their own inheritance tax — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The tax rates vary depending on the inheritance’s size and the beneficiary’s relationship to the person who died. Spouses (and sometimes children or other descendants) are generally exempt from the inheritance tax.
Estate tax: This is the tax taken out of an estate (cash, real estate, stocks, etc.) upon someone’s death. The federal estate tax only comes into play when the total estate value exceeds $12.92 million (the same as the lifetime gift tax exclusion). Any portion of the assets exceeding this amount is a taxable estate. Some states have their own estate tax as well, and the exclusion amount varies depending on the state.
Gift tax calculator
Estimate your gift taxes owed for 2023 with TaxAct’s gift tax calculator.
Step 1: Select your tax year.
Step 2: Select your filing status.
Step 3: Enter any gifts given before the tax year selected.
Step 4: Enter any gifts given during the tax year selected.
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The post Gift Tax: Do I Have to Pay Tax When Someone Gives Me Money? appeared first on TaxAct Blog.
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