Gift-giving is a common practice among family and friends, especially during the holiday season. While it is a thoughtful and generous gesture, did you know that it could have tax implications? Specifically, the IRS requires taxpayers to report certain gifts, which are defined as transfers of cash or any type of property between people when one person doesn’t receive the full value in return. Additionally, failure to report these gifts can result in penalties. In this blog post, we’ll explore the basics of gift tax, including what it is, who pays it, and how it works. So, whether you’re planning to give or receive a gift, read on to gain a better understanding of gift tax and stay on the right side of the IRS. Let’s get started!  

What is gift tax, and how does it work? 

If you transfer cash or property to someone else without receiving full value in return, you may be subject to the federal gift tax. Selling something for less than its full value or giving an interest-free or reduced-interest loan could also be seen as giving a gift. The gift tax applies to any gift of considerable worth, including money or property. But wait, there’s more! If you decide to give something other than money, the value of that gift for tax purposes is based on its fair market value on the day it was given. Also, the tax will be applied regardless of whether the person making the transfer intends it to be a gift or not. So, if you’re feeling generous, just remember to keep gift tax in mind! 

Who pays the gift tax? 

Usually, the person who gives the gift is the one who has to pay the gift tax. But here’s the catch – in some cases, the person who gets the gift might decide they want to pay the tax instead. For instance, when there is a special agreement between the giver and receiver, the receiver may agree to pay the gift tax on behalf of the giver. Maybe they just really love taxes or want to impress their accountant. Who knows?

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How much can you gift tax-free? 

The IRS has rules about how much you can give someone before you have to start worrying about gift tax. There are two exclusions you can use to avoid paying taxes on your gifts – an annual exclusion and a lifetime exclusion. It’s like a gift-giving cheat code! Plus, there are certain gifts that are generally exempt from taxation, like presents you give to your spouse (whew!), medical expenses you pay, and tuition you cover. And get this – even gifts to political organizations for their use can be tax-free.  

What is the annual gift tax exclusion, and how does it work? 

Each year, you are able to give away a certain sum of money per person without having to worry about the gift tax – this is referred to as the annual gift tax exclusion. According to the IRS, the annual exclusion amount applicable per donee for 2023 is $17,000.  

What is the lifetime gift tax exclusion, and how does it work?

During your lifetime, you may pass on a certain amount of property or cash without incurring the gift tax – this is known as the lifetime exemption. Pretty handy, right? As of 2023, there’s a lifetime gift tax exemption of $12.92 million. However, even if you’re not planning on giving away anywhere near $12.92 million, it’s still important to remember that you may need to file gift tax returns. So, make sure to keep track of the gifts you give just to be on the safe side. By the way, if you’re unsure about whether or not you need to file a gift tax return, it’s always a good idea to check with a licensed tax professional. 

Consult Manay CPA Tax Professionals 

We know that talking about taxes is not exactly everyone’s cup of tea, but when it comes to gift taxes, it’s better to be safe than sorry, right? If you’re feeling unsure about how much you can give or whether you’ll owe any taxes, it’s always a good idea to talk to our licensed tax professionals who know the ins and outs of the tax code. Think of them as your tax superheroes who can swoop in and save the day (and your bank account). We’re here to make sure you stay on the nice list with the IRS and your loved ones. Tax problems, solved. Call us at 404-900-1040 or schedule an appointment today!

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Manay CPA is a reputable, full-service CPA firm based in Atlanta, Georgia. Founded in 2001, we provide comprehensive accounting and tax solutions to individuals and businesses across all 50 states.

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