Beginner's Guide to Gift Taxes

As usual, social media finance guru’s are wrong! I’ve seen so many posts regarding gift taxes that don’t actually explain how gift taxes work.

Let’s dive into the concept of gift taxes. After reading this, you’ll know who’s real and who’s fake on social media!

What is considered a gift?

Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

Who pays gift taxes?

The donor is generally responsible for paying gift taxes. There are some situations where the donee can agree to pay the taxes.

Who much can you give before gift taxes are paid?

There are two main things to know about gift taxes:

1. The Lifetime Gift Limit

The lifetime gift limit is $13.61 million! You can give up to this amount over a person’s without haying to pay any gift taxes.

2. The Annual Exclusion

The annual exclusion is $18k. Meaning, you can give up to $18k without the gift being included in the lifetime gift limit.

This is where people get stuck. They assume that if you gift $20k in a year, you have to pay taxes on the $2k gifted over the $18k limit.

Nope! Any amount that is over the annual limit of $18k will count against your lifetime gift limit of $13.61m.

If you give over the annual exclusion, the excess value needs to be reported on a gift tax return (Form 709).

What gifts are excluded?

1. Gifts that are not more than the annual exclusion for the calendar year.

2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).

3. Gifts to your spouse.

4. Gifts to a political organization for its use.

Who much are gift taxes?

Gift taxes range from 18%-40%

Conclusion

The gift tax exclusion may seem simple at first glance, but as we've seen, there are nuances that many social media gurus often get wrong.

Keep in mind that tax laws can change, so staying updated is key.

This beginner's guide is just the first step. If you have further questions or complex financial situations, consulting a tax professional is always a wise move.

Understanding the annual exclusion amount and the lifetime exemption is crucial for avoiding unwanted tax surprises.

Notes:

These thresholds are current for 2024 but can change.

The lifetime gift limit increased to $13.61m from $12.92m in 2023.

The 2024 lifetime limit and annual exclusion is set to expire after 2025 unless Congress votes to extend or make the current limits permanent.

You will not be penalized for taking advantage of the current limit if Congress decreases the limit in future years.