Gift tax is a form of taxation that is imposed on gifts given between individuals. This tax is applicable to the value of the gift, which is determined by subtracting any form of reimbursement from the market value of the gift. Gift tax is paid by the donor, not the recipient of the gift.
When giving a recipient a gift, the donor must declare any gifts that are worth over a certain monetary amount and may be subject to gift taxes if the lifetime total given exceeds the threshold established by the Internal Revenue Service (IRS). For 2023, the gift tax exclusion amount is $17,000 per person per year. Any gifts that exceed the exclusion amount must be declared to the IRS on a Gift Tax Return.
Recent Gift Tax Examples
For example, if you give your niece $25,000 for her college tuition in 2023, you would have to pay gift tax on the $8,000 that exceeded the gift tax exclusion. Alternatively, if you give five of your nieces and nephews a laptop each totaling $17,000, you would not have to pay any gift tax as the total amount for each would be under the exclusion limit.
Generous Donors Can Take the Gift Tax Exemption Seriously
Gift taxation is an important concept to understand when gifting a large amount of money or other gift. If you are a generous donor and wish to make multiple gifts to a recipient that exceed the gift tax exclusion, then you can take the gift tax exemption seriously. By understanding the gift tax rules, and taking advantage of the annual gift tax exclusion, you can spread out your charitable donations by distributing generous gifts over multiple years without exceeding the gift tax exclusion threshold.