Who pays the gift tax?

The donor, but thankfully there are many exclusions (see #2).  The recipient doesn’t pay tax on the gift nor do they report it to the IRS.

What gifts are excluded from the gift tax?

The following gifts are not subject to tax:

1. Gifts that are below the annual per-person exclusion, currently $18,000 in 2024.

2. Unlimited gifts to your spouse, including same-sex marriages, if the spouse is a US citizen.

3. Gifts to IRS-approved charities and political organizations. Interestingly, although the Ethics Reform Act of 1989 prohibits gifts to federal employees and officials, the President and Vice President are exempt from gift restrictions.

4. Direct payment of tuition (although not room and board) or medical expenses for another person. Payments must be made to the institution or medical facility.

What is the lifetime exemption?

The current lifetime exemption or unified tax credit is $13,610,000 per person.  This means that gift taxes won’t be assessed until you exceed that amount.  This amount is set to sunset on December 31, 2025.  Starting in January 2026, the exemption will likely return to $5,000,000 (adjusted for inflation).  However, if an individual takes advantage of the increased amount prior to 2026, they will not be penalized when the exemption is lowered.

How are gift taxes connected to estate taxes?

Lifetime gifts reduce your estate tax exemption (unless they follow the exclusions outlined in #2).  The exemption amounts are unified for gift taxes, generation-skipping transfer taxes and estate taxes, however, by gifting certain appreciating property prior to death an individual may be able to mitigate the overall taxes.

How does the annual exclusion work?

An individual and their spouse can each gift $18,000 annually per donee.  Thus, a married couple with 4 children could gift $36,000 to each child, or $144,000 without counting towards their lifetime exemption.  Making such gifts is a good way to reduce your taxable estate without impacting your lifetime exemption.

What if the gift exceeds the annual exclusion amount?

The IRS requires you to file a Gift Tax Return – Form 709 which is due with your normal tax filing.  Taxes are not assessed until the total lifetime gifts exceed the exemption amount ($13,610,000 for 2024). For tracking purposes, it is useful to keep copies of all the gift tax returns that you file.  Couples who are splitting gifts over $18,000 must report these gifts on form 709 and the consenting spouse must sign.  It is important to keep in mind that as long as the cumulative gifts are below the lifetime exemption amount, no taxes will be incurred.

Can I gift more to a 529 Plan?

Yes, there is a special lump-sum rule that allows you to contribute up to 5 years of gifts or $90,000 per child (or $180,000 as a married couple) to a 529 College Savings Account without reducing your lifetime exemption.  If the lump-sum option is chosen, no other gifts can be made to the same beneficiary during the five-year period without reducing the unified credit.  This is a great strategy for grandparents who want to jumpstart college savings for their grandchildren while removing the funds from their estate.