What Gifts Are Subject to the Gift Tax?

Exemptions, exclusions, and exceptions can help you avoid the tax

Woman hugging a man after receiving a gift

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The federal gift tax is meant to prevent taxpayers from giving away their assets tax-free during their lifetimes, which would keep their estates from being subject to the estate tax after they die. Because of this, the tax itself focuses on the giver, not the recipient.

Learn more about how the federal gift tax works and whether it applies to your gifts.

Key Takeaways

  • The tax status of a gift depends on the recipient, its fair market value, and whether it is for use in the present or future.
  • The first $16,000 that an individual gives another individual in the tax year is exempt from the gift tax.
  • Charitable gifts, gifts to your spouse, and paying someone's medical bills or tuition are not subject to the gift tax.

How Does the Federal Gift Tax Work?

The federal gift tax applies to valuable financial gifts that one party gives to another one. It isn't meant to regulate everyday gifts.

Because it's meant to keep people from avoiding estate taxes after their death, the gift tax is payable by the donor, not the recipient of a gift. It also doesn't apply to all gifts made during the donor's lifetime.

Individuals are free to give money or property away in relatively small increments. If you send your grandkids a check for a few hundred—or even a few thousand—dollars, that isn't subject to the gift tax. Likewise, if you pay for a friend or relative to go on a trip with you, that doesn't trigger the gift tax either. You can even give certain gifts of more significant value because they're exceptions to the usual rules.

Instead, the gift tax applies to large financial gifts of thousands of dollars. These can be cash gifts or items that would otherwise cost a large amount of money, such as a new car or a house.

The Timing of Taxable Gifts

Gifts are taxable in the year that you give them. For example, if you write a $25,000 check for your son in December of 2022, you have to report it on your 2022 tax refurn (filed in 2023) no matter when he deposits it. If he doesn't deposit it until January 2023, the taxable portion of the gift is still taxed in 2022.

Loans and Cancelled Debts

Part of that $25,000 check is still taxable if you give it as a loan but don't charge the applicable federal interest rate. In that case, the "gift" is the difference between the rate you do charge—if any—and the federal rate in place at that time.

This rule only applies to loans of more than $10,000 unless you "forgive" the debt and decline repayment. In that case, the portion of the $25,000 that doesn't qualify for exemptions or exclusions becomes taxable.

What Counts As a Gift for Tax Purposes?

It can be complicated to figure out what does and doesn't count as a gift for tax purposes. Whether a gift is taxable depends on three factors:

  • Who receives it
  • Its fair market value
  • Whether it was a present interest gift or a future interest gift

The Recipient of the Gift

Certain people fall into exempt categories, meaning you don't have to pay taxes on gifts that you give them. For individuals, this is based on their relationship to you. For organizations, it depends on the tax status of the organization.

All gifts made to your spouse are exempt from the federal gift tax, provided that your spouse is a U.S. citizen. The federal unlimited marital deduction allows spouses to give property to each other without taxation either before or after death.

In 2022, you can give up to $164,000 a year to a spouse who isn't a U.S. citizen. This threshold is reviewed periodically as it is adjusted for inflation.

Gifts to political organizations and qualifying charities are fully exempt as well, although certain rules do apply. For example, gifts made to political organizations must be for their own use.

While gifts to your spouse are exempt, however, gifts to your children, grandchildren, other relatives, or friends are not. The only exception to this rule is for medical expenses and tuition. You can pay someone's medical bills or school tuition with no limit and without incurring a gift tax.

To do so, however, you must make the payments directly to the care provider or educational institution. It's considered a gift if you give your friend or relative a check or pay their credit card bill for them, even if the money is meant to cover medical or education expenses.

Fair Market Value

A gift is anything you give without receiving fair market value in return. The Internal Revenue Service (IRS) defines fair market value as what would be paid for an item or asset if neither the buyer nor the seller were under any duress to complete the transaction.

The value of a gift is clear if you give cash. You've made a $10,000 gift if you give someone $10,000 and receive nothing in return. But you're considered to have given a gift of $150,000 if you sell someone a $300,000 home for $150,000. That's because you didn't receive anything in exchange for half the property's value, which is the remaining $150,000.

Fair market value is typically a gift's appraised value or a value comparable to other similar items sold at the same point in time and in the same condition. 

Present Interest vs. Future Interest

A gift of present interest is one that the recipient is free to use, enjoy, and benefit from immediately. It comes with no strings attached. It's a future interest gift if the recipient doesn't have complete use and enjoyment of it until some future point in time. This is an important distinction.

Common examples of future-interest gifts are reserving a life estate in real estate or funding a trust. In either case, your beneficiary typically doesn't become the full and vested owner until your death.

Future interest gifts are taxable and must be reported to the IRS on Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return.

How Much Can I Gift Tax-Free? 

Not every gift is taxable, even if it meets those criteria. Whether you have to pay tax on your gift depends on its value.

Federal law exempts the first $16,000 you give per person per year in 2022. Only the balance of the gift's value over $16,000 is taxable. You can apply it to gifts made to anyone other than your spouse, such as your children.

This annual exclusion from the gift tax can increase periodically in $1,000 increments to keep pace with inflation, but it doesn't always do so.

For example, if you make a one-time gift of $116,000 to your child for the purchase of a home, $16,000 of the gift would be free and clear of the federal gift tax. The remaining $100,000 would be considered a taxable gift.

If you give your child $16,000 in December and another $32,000 in January, you would only pay tax on $16,000 of your gift. The $16,000 from December would be exempt, as would half of the amount you gave in January.

This limit only applies per person. So if your child was married, you could give them and their spouse each $16,000. This would allow you to give twice as much without incurring a gift tax on either amount. And if you are married, you and your spouse could each give $16,000 to each person. This would allow you to give a total of $64,000 tax-free to your child and their partner.

What Is the Lifetime Gift Tax Exemption?

Federal tax law also offers a lifetime exemption from the gift tax, but it's shared with the estate tax. This lifetime exclusion is sometimes referred to as the "Unified Tax Credit" because it covers both taxes. The cap is set at $12.06 million in 2022, up from $11.7 million in 2021.

You can either pay the gift tax on the balance of a gift over the $16,000 annual exclusion or apply the balance to this lifetime credit. No gift tax would be due, but the amount of a gift is subtracted from exemption each time you do that. This leaves less to shelter your estate from any applicable taxes at the time of your death. Only very sizable estates should be affected by this rule, however. 

Frequently Asked Questions (FAQs)

When are gift tax returns due?

A gift tax return is due on April 15 the year after you made the gift. You will need to file Form 706, plus any related amendments or schedules.

How much is the gift tax?

The tax rate for gifts depends on the value of your gift. It ranges from 18% for gifts with a taxable value under $10,000 to 40% for gifts with a taxable value over $1,000,000.

Article Sources

  1. Internal Revenue Service. "Frequently Asked Questions on Gift Taxes."

  2. Legal Information Institute. "26 U.S. Code § 7872 - Treatment of Loans With Below-Market Interest Rates."

  3. Internal Revenue Service. "Frequently Asked Questions on Gift Taxes for Nonresidents Not Citizens of the United States."

  4. Internal Revenue Service. "Frequently Asked Questions on Gift Taxes."

  5. Internal Revenue Service. "Publication 559 Survivors, Executors, and Administrators." Page 25.

  6. Internal Revenue Service. "Estate Tax."

  7. Internal Revenue Service. "Filing Estate and Gift tax Returns."

  8. Internal Revenue Service. "Instructions for Form 709."