Taxes Learn Why Annual Exclusion Gifts Aren't Taxable By Julie Garber Updated on January 27, 2023 Reviewed by David Kindness Fact checked by Yasmin Ghahremani In This Article View All In This Article Gift Tax Exclusions and ATRA How the Annual Exclusion Works Other Gift Tax Exclusions Frequently Asked Questions (FAQs) Photo: kali9 / Getty Images An annual exclusion gift is one that is below a certain dollar amount, so that qualifies it to be excluded from federal gift taxes in a given year. For the 2022 tax year, the limit is $16,000 per recipient, and in 2023 it's $17,000. The person who gives the gift is responsible for paying the gift tax, meaning you can give away this much in cash or property value each year without incurring a gift tax and without it counting toward your lifetime gift tax exclusion (called your "lifetime exemption"). Key Takeaways An annual exclusion gift is one that is below a threshold that qualifies it to be excluded from federal taxes in a given year.In addition to a yearly gift exclusion, there is also a lifetime gift tax exclusion that shifts periodically for inflation. The lifetime exclusion is $12.06 million for the 2022 tax year and $12.92 million for 2023. Spouses can combine their annual exclusion gift to double the threshold limit before taxes kick in. Gift Tax Exclusions and ATRA The gift tax is designed to prevent individuals from giving away their wealth during their lifetimes in order to avoid estate taxes for their beneficiaries after they die. It's been around for a while, but the American Taxpayer Relief Act of 2012—commonly known as ATRA—increased the top marginal tax rate on estate assets from 35% to 40%. ATRA also indexed the lifetime gift tax exclusion for inflation, so it increases periodically. The lifetime exclusion is $12.06 million for the 2022 tax year and $12.92 million for 2023. If you go over the annual exclusion amount, you can either apply this lifetime exclusion to the balance or pay the gift tax. Note The annual exclusion is also indexed for inflation, but it can only increase in $1,000 increments. It doesn't do so every year. How the Annual Exclusion Works If your daughter needs $25,000 for a down payment on a house and you give her that amount, you will owe the gift tax on $9,000—the balance over the $16,000 annual exclusion in 2022. On the surface, it's that simple, but a couple of wrinkles can work to your advantage. Maybe your daughter asks you for the money in December, and she's planning to close on the property in January. In this case, you can give her the money tax-free: $16,000 in December in one calendar year and $9,000 on January 1 of the next calendar year. The exclusion rolls over when the calendar does. You can even give your daughter the entire $25,000 in January—or any other month of the year—if you're married. How the Annual Exclusion Works for Spouses Spouses can combine their annual gift tax exclusion amounts and give a total of $32,000 per recipient in 2022 ($34,000 in 2023) without incurring any gift tax liability. They must file gift tax returns for the year, however, reporting this to the IRS: Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. Note Spouses must file separate Forms 709, even if they file a joint income tax return. Other Gift Tax Exclusions In addition to the annual exclusion gift, there are other forms of gifts that are not subject to the federal gift tax. A few more common examples include: You can pay unlimited tuition or medical costs for an individual. Donations or gifts to political organizations are fully tax-exempt. Gifts made from one spouse to another (if the spouse is a U.S. citizen) are exempt from gift taxes due to the unlimited marital deduction. Note Gifts made to a spouse who is not a U.S. citizen are treated as any other and subject to taxation above the annual gift exclusion amount. They are also subject to their own lifetime exclusion amount, set at $164,000 in 2022 and 175,000 in 2023. Frequently Asked Questions (FAQs) Why are gifts taxed in the first place? The IRS imposes a tax on gifts to discourage people from skirting estate taxes by giving away their money during their lifetimes. How much money can I give my child before I'm taxed on it? In the 2022 tax year, you can give up to $16,000, and in 2023, you can give $17,000 without the gift being subject to taxes. If you go over that amount, you can apply the lifetime exclusion to it. To avoid paying taxes on gifts to your child, be sure to stay under the threshold amount each year or under the lifetime exclusion limit for your lifetime. Can I deduct gifts on my tax return? Generally, gifts given to individuals do not affect your income tax liability. However, if you made a gift to a qualifying charity, it may be deductible. If your estate or gift-giving situation is highly complex, you may wish to consult a CPA or tax professional for detailed and personalized advice. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. "Frequently Asked Questions on Gift Taxes," Expand "How Many Annual Exclusions Are Available?" IRS. "Estate Tax." U.S. Congress. "H.R.8 - American Taxpayer Relief Act of 2012." IRS. "Frequently Asked Questions on Gift Taxes," Expand "What if My Spouse and I Want to Give Away Property That We Own Together?" IRS. "Instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return." IRS. "Instructions for Form 709." IRS. "Frequently Asked Questions on Gift Taxes," Expand "What is considered a gift for U.S. gift tax purposes?"