Understanding Gift Taxes: A Simple Guide for Generous Hearts
Perhaps you want to help your children make a down payment on a home. Or contribute to your grandchild’s college savings plan. Or give a retirement gift to a loyal household employee. But one concern that might be holding back your generosity is the question of whether you’ll have to pay the federal gift tax. It’s a topic that comes up in all kinds of discussions of giving.
Still, even if you probably will never have to pay gift taxes, it’s worth getting the answer to common questions we get about this widely misunderstood IRS provision.
Who pays this gift tax: The recipient or me?
It’s a common misconception that the recipient of the gift is the one who has to pay the gift taxes. Not true. Generally, only the person making the gift is potentially subject to the gift tax and only if the value of the gift is more than $18,000 in one year. The recipient doesn’t have to pay the tax unless the person making the gift doesn’t pay or report it.
But here’s the good news: Most gifts will never be subject to gift taxes unless the giver gives more than $13.61 million over their lifetime. More on that later.
How much can I give? (The $18,000 question)
In 2024, you can give up to $18,000 per year to any individual without having to report the gift to the IRS. In fact, you can give separate gifts of $18,000 or less annually to as many people as you want without notifying Uncle Sam. Even better, if you’re married, you and your spouse can each give up to $18,000 to the same person without triggering gift tax issues. The complications arise only when you give more than $18,000 to someone.
But not all gifts over $18,000 need to be reported. Money passed between married spouses who are U.S. citizens is never considered to be a gift, no matter the amount. Also, money you use to pay for someone’s medical bills or tuition expenses doesn’t need to be disclosed for gift tax purposes, as long as you pay the institution directly. And, surprisingly, gifts you make to qualified political organizations are exempt as well.
Does the gift tax apply only to cash gifts?
No. Other assets can also count, including gifts of real estate, stock shares, a car or fine art and collectibles. If the value of a non-cash gift is over $18,000, you will need to provide documentation of its fair market value to the IRS, including professional appraisals where required.
Another exception is for large gifts you may want to make to your child’s or grandchild’s 529 college savings plan. Using a strategy called superfunding, you can make a single gift of up to five times the annual gift tax limit — $90,000 — as a contribution to a 529 plan without this amount counting toward your lifetime gift tax limit.
However, for tax purposes you must treat this contribution as if it were made over a five-year period. And if you use this strategy, you’ll have to file IRS Form 709 every year during the five-year period following the superfunded gift to document that you’re spreading this amount over five years.
Are any gifts tax-deductible?
The only gifts that are potentially tax-deductible are those you make to qualified charitable organizations (QCDs) or giving vehicles, such as donor-advised funds.
Do I have to pay gift taxes when I file Form 709?
You can if you want to. But you probably won’t need to. Why? Because everyone is entitled to a personal lifetime gift tax exclusion of $13.61 million.
What this means is that you can keep on making gifts of more than $18,000 (and filing Form 709) year after year, and all that will happen is that these gifts will be applied to your lifetime exclusion. You’ll never have to pay gift taxes unless your total lifetime giving exceeds this amount.
The $13.61 million exclusion is used both for gift tax and estate tax purposes. Meaning that all of the gifts of over $18,000 you make during your lifetime are deducted from this exclusion. The remainder can be used to reduce the taxable value of your estate when you pass on.
For example, let’s say that during your lifetime the total value of all the individual gifts of more than $18,000 you make amounts to $1 million. If you applied this amount to your lifetime exemption, “only” $12.61 million of the remaining amount could be used to reduce the taxable value of your estate.
The larger lifetime exclusion went into effect in 2018 as part of the Tax Cuts and Jobs Act of 2017. According to the IRS, the current lifetime gift and exclusion provision is in effect through the end of 2025, so any gifts you make until then will not be adversely impacted, even if the exclusion amount is reduced starting in 2026.
When the topic is taxes, the reality is almost always more complicated than it appears to be. For example, while the lifetime exclusion amount generally increases over time due to inflation, it could also be decreased before 2026 by an act of Congress and a future presidential administration.And this lifetime estate tax exclusion applies only to federal estate taxes. Your state may have lower lifetime exclusion limits. Here is a list of the exclusions for states where most of our clients are located.
Connecticut
Estate tax exemption: $12.92 million
Connecticut is the only state that imposes a gift tax on assets you give away while you’re alive. If you make taxable gifts during the year that exceed $18,000—the federal gift tax exclusion for 2024 - state law requires that you file a Connecticut estate and gift tax return. You’ll owe taxes if the aggregate value of gifts made since 2005 exceeds $12.92 million at a flat 12% rate.
New Jersey
Estate tax: None
The Garden State does impose a tax on inherited property with a value of $500 or more. However, the decedent’s spouse, domestic partner, parents, grandparents, children and grandchildren are exempt from inheritance taxes in New Jersey. The first $25,000 of property inherited by a decedent’s sibling, son-in-law or daughter-in-law is also exempt. After that, those heirs must pay the inheritance tax at rates ranging from 11% to 16%. All other individual heirs pay a 15% tax on the first $700,000 of inherited property and a 16% tax on everything over $700,000.
New York
Estate tax exemption: $6.58 million
New York’s estate tax exemption is adjusted each year for inflation, and rates range from 3.06% to 16%. Taxable gifts made by the decedent as a New York resident within three years prior to death are included as part of the estate. Notably, New York’s estate tax is a “cliff tax.” That means if the value of the estate is more than 105% of the current exemption, the entire estate will be subject to state estate tax.
Pennsylvania
Estate tax: None
Although the Keystone State has no estate tax, the inheritance tax in Pennsylvania could prove costly for adult children and other heirs. Spouses and the decedent’s parents (if the decedent was age 21 or younger) are exempt. Children and grandchildren will pay a 4.5% inheritance tax, siblings will pay 12%, and all other heirs will pay 15%. A 5% discount is allowed if the tax is paid within three months of the decedent’s death.
So, there you have it – the lowdown on gift taxes in a nutshell. If your family is feeling generous, it's good to know the rules, right? Now go share this wisdom at the dinner table, and who knows, you might just become the family tax expert!
