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No Tax on Gifts Exceeding $16,000 per Year
The federal gift tax seems to be among the most misunderstood elements in the tax code. Many would like to provide some financial help to family members or friends but are concerned about having to pay the gift tax.
There is a widespread but mistaken belief that if someone give someone else (other than a charity) more than $16,000 in the year 2022, they will have to pay the gift tax.
This is completely FALSE.
The federal gift tax is directly linked to the estate tax. In 2022, the estates valued at $12,060,000 or less for single people and double that, $24,120,000 for married couples, are exempt from the federal estate tax.
When you make a gift to someone that exceeds the $16,000 annual exclusion limit (which is increasing to $17,000 in 2023), the amount exceeding that limit goes toward the $12,060,000 estate tax exemption and reduces it. These amounts are doubled for married couples filing jointly. Only if a person has exceeded the estate tax exemption during their lifetime do they have to pay the gift tax on gifts exceeding the annual exclusion amount.
So, if a single person gave a $100,000 gift to another person in 2022, $16,000 would be excluded, and the remaining $84,000 would lower the estate tax exemption from $12,060,000 to $11,976,000. Unless the person's estate was larger than this at their death, there will be no estate tax. And again, the estate tax exemption is doubled for married couples filing jointly.
The only action the above individual would need to do with regard to the IRS is complete Form 709. This form isn't the simplest to complete, but it shouldn't deter someone from making a sizable gift if they want to. There is no tax to pay.
And the $16,000 annual exclusion amount applies to each giver and each recipient. This means that a single person can give a married couple $32,000 in a single year ($64,000 if the giver is a married couple) without even being required to complete Form 709.
As you can see, under current law, the vast majority of taxpayers will never pay a penny of federal estate tax, and, consequently, they will never pay a penny of gift tax either.
Some are concerned about the estate tax exemption being currently set to halve in 2026, but this shouldn't be a problem for most people for several reasons. First, even halving the estate tax exemption amount still means that very few people will have estates large enough to be impacted at all. Second, those with estates that might be impacted by the estate tax, especially those who are married, can still give away substantial funds using the annual exclusion amount. Third, those who have taken "advantage of the increased gift tax exclusion amount in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels", per the IRS. And fourth, there seems to be significant political pressure for the current estate tax limits to not be reduced, and many suspect that the law will be changed so that the limits will not be reduced in 2026.
So, unless you're planning on giving and/or leaving behind an estate with a combined total exceeding $12.06 million or double that if you're married, you won't have to pay a gift tax. You merely report gifts exceeding the annual exclusion amount.
Also, there are two specific types of of 'giving' that aren't subject to the $16,000 annual exclusion amount. First, you can pay for a loved one's tuition at a primary or secondary institution (i.e., K-12 or college), though the payment must be made directly to the institution. Second, you can pay for a love one's medical expenses by, again, making the payment directly to the care provider or to the company providing your loved one with medical insurance.
