Gift Tax 101: Everything You Need to Know

If you’ve ever wondered about the taxes related to the gifts you give or receive, you’re in the right place. Gift tax is ultimately a fee imposed by the government on certain gifts. Don’t worry— your birthday presents are usually safe – for the most part – from the gift tax, but there are some gifts that aren’t. 

So, what is gift tax, and do you have to pay it? In this article, we’ll explore gift tax to make sure you understand the basics and feel confident when the time comes to do your taxes. Ready to dive in? Let’s get started. 

What is the gift tax?

The gift tax applies to the money or property someone gives to another person. It’s like a tax on presents, but only really big ones.

If you give someone a gift worth a certain amount of money, you may need to pay a tax on that gift. The idea is to prevent people from giving away large amounts of money or property to avoid other tax responsibilities. 

In the US, you can give someone a certain amount of money each year without having to pay a gift tax. This amount is set by the government and can change. If your give is more than this set amount, you may have to pay a tax on everything over that threshold.

So, how much is the gift tax? The gift tax rate can range from 18% to 40%, depending on the value of the gift. 

What is a “gift” for tax purposes?

For tax purposes, a gift is something you give to someone else without expecting to be paid back. The key is that it’s a voluntary transfer of money, property, or assets, and it’s not a loan. Here are some examples of what’s considered a gift for tax purposes: 

• Cash
• Real estate and other types of property
• Stocks and investments
• Inheritance

Are there any exceptions to the rule?

There are several exceptions to the gift tax rule, which means that certain gifts may not be subject to the gift tax. Common exceptions are: 

• Annual exclusion: Each year, you can give a certain amount to another person without triggering the gift tax. 
• Gifts to your spouse: Gifts between spouses who are both US citizens are generally not subject to gift tax. 
• Tuition or medical expenses. Payments made for someone’s education or medical expenses are typically not considered gifts. 
• Gifts for political organizations: Contributions to political organizations for their use are generally not subject to gift tax. 

Is the gift tax deductible?

The gift tax is not deductible on your federal income tax return. However, there is an important exception: charitable giving. Charitable contributions made to qualified organizations may be deductible on your income tax return, but this is separate from the gift tax. 

So, while gifts subject to the gift tax typically aren’t tax write-offs, if you make a gift to a qualified organization, you may be eligible to claim a deduction for that contribution on your income tax return.

Looking to get the most out of your tax return? Check out these overlooked tax deductions. 

Who pays the gift tax?

The gift tax is typically paid by the gifter— the person making the gift— and not the recipient or giftee. The person giving the gift is responsible for reporting it when they file and paying any applicable tax on the gift. 

However, there are some situations where the recipient can choose to pay the tax. 

What is the gift tax exclusion?

The gift tax exclusion is an amount set by the government that allows you to give a certain value of gifts each year without having to pay a gift tax. This exclusion prevents individuals from being taxed on small or routine gifts. Those whose love language is gift-giving can breathe a sigh of relief.

Keep in mind that exclusion amounts can change, so you should always check the current limits set by tax authorities before filing.

How does the annual exclusion work?

The annual exclusion depends on the year of the gift and is determined per gift recipient. In 2023, you can give a total value of gifts up to the annual exclusion of $17,000 per individual. For 2024, the annual exclusion is $18,000. 

So, each year, you can give gifts up to the specified exclusion amount per person to as many people as you want without owing gift tax. If your gifts exceed the annual exclusion, you may need to report the excess and possibly pay gift tax on that portion. 

Gift tax strategies

Planning ahead can help you minimize your gift tax this year. Whether you’re considering passing wealth to loved ones or making large financial gifts, consider the below:

1. Donate by credit card

Did you know that donations made via credit card are deductible in the year they are charged and not the year that they are paid? By donating to your favorite charity by Dec. 31 (also one of the largest charitable giving days of the year), you can hold on paying the bill until 2025.

In addition, you can check out TurboTax TaxCaster to estimate your taxes and see if you need to make any last-minute tax moves.

2. “Spring cleaning” in December

Get a head-start on your spring cleaning, help those less fortunate, and get a tax deduction in the process! Donate old clothes, books, household items, toys, and sporting goods to a local charity, and be sure to keep the receipts.

3. Split gifting with your spouse

Give more by splitting the gifting with your spouse! Married couples can double the annual exclusion amount by combining their individual exclusions. Jointly give gifts and give more without triggering gift tax.