If you made large enough gifts to relatives or friends, you might owe the federal gift tax. Here are the basics on how the gift tax works.
Federal gift tax is that gift giver, not gift recipients, must pay it. You won’t owe the tax until you’ve given away more than $11.7 million (new lifetime exclusion in 2021) in cash or other assets during your lifetime. If you’re married, you can elect the gift given split with your spouse.
The annual federal gift tax exclusion allows you to give away up to $15,000 each in 2021 as many people as you wish without those gifts counting against your $11.7 million lifetime exemption. The annual exclusion is raised to $16,000 for 2022. If you have given gifts over $15,000 in 2021, even if you don’t owe any gift tax because of $11.7 million lifetime exemption, you will have to file Form 709 with IRS. IRS form 709 reports transfer of assets that may be subject to federal gift tax and certain generation-skipping transfer taxes.
For example, if you give two favored relatives $20,000 each in 2021 and give another relative $10,000. The $20,000 gifts are called taxable gifts because they exceed the $15,000 annual exclusion. But you won’t owe any gift tax unless you’ve exhausted your lifetime exemption amount.
• Assuming you haven’t, the two taxable gifts simply reduce your lifetime exemption by $10,000: ($20,000 – $15,000) x 2 = $10,000.
• The other gift of $10,000 is ignored, because it’s below the $15,000 annual exclusion for 2021.
If you give three individuals $15,000 each in 2021, these gifts are ignored because they don’t exceed the annual exclusion.
The return is due by tax filing deadline, typically April 15, of the year after you make the gift. If you extend your personal tax 1040 to October 15, the extended due date applies to your gift tax return too. Each spouse must file a separate return if he or she makes any taxable gifts. You can choose to split gifts with your spouse.
For example, say you gave $30,000 to your child in 2021. By treating it as a split gift, you can completely shelter the gift with your $15,000 exclusion plus your spouse’s $15,000 exclusion.
• That way no gift tax is due.
• The gift doesn’t reduce the $11.7 million lifetime gift tax exemption in effect for 2021 or the estate tax exemption for you or your spouse.
If you choose to make a split gift, you must file Form 709, and your spouse must consent to the arrangement.
Some gifts are tax-exempt. Among other, the following types of gifts are exempt from the federal gift tax. You can make unlimited gifts in these categories without any gift tax or estate tax consequences without having to file gift tax returns:
• Gifts to IRS-approved charities
• Gifts to your U.S. citizen spouse
• Gifts covering another person’s medical expenses, as long as you make the payments directly to medical service providers
• Gifts covering another person’s tuition expenses, as long as you make payments directly to the educational institution. (Payments for room and board, books, and supplies don’t qualify for this exception, but you can cover those costs by making a direct gift to the student under the annual exclusion.)
This article only covers the basics of federal gift taxes. For more information, please see IRS Publication 950: Introduction to Estate and Gift Taxes. Please See also the instructions for Form 709.