Is Gifting a Taxable Event?
Taxpayers often wonder whether gifts of cash, assets or property are taxable.
The short answer is that generally they are not: The IRS allows individuals to give away assets or property each year tax free, but only up to a set amount. For 2024, the annual gift tax exclusion is $18,000. However, in practice, the amount is higher because the IRS allows you to gift up to $18,000 to as many people as you wish. For example, you can give up to $18,000 to each of your children and grandchildren.
Furthermore, every individual has a lifetime gift and estate tax exemption; the amount in 2024 is $13.61 million.
Some common complications
Not unexpectedly, this “simple” answer quickly grows more complicated. For example:
- Only “present interest” gifts are eligible for the gift tax exclusion. A gift is considered present interest if the recipient has an immediate right to the use, possession and enjoyment of the property or income from the property.
- A gift of “future interest” cannot be counted as excluded from the annual gift tax. However, the rule about future interest has further qualifications. Gifts to minors may still qualify for the annual gift exclusion if the minor will have access to the gift by age 21. Donors may use a Crummey trust to make future-interest gifts to minors, and the gifts will be still eligible for the annual gift tax exclusion.
- A donor who wishes to gift more than $18,000 to an individual may do so, but they reduce the amount of their lifetime exclusion by the amount over $18,000. For example, if a donor gave $25,000 to each of their children and grandchildren, their lifetime exclusion amount would be reduced by $7,000 multiplied by the number of gifts they made.
- A donor may give assets rather than cash, but the recipients might be subject to capital gains taxes on the carryover basis of the gift. In other words, if the recipient sells the gifted property, and if it has appreciated since the donor bought it, the recipient must calculate capital gains based on the donor’s original purchase price. If the recipient sells the gift at a loss, however, that loss would not be recognized by the recipient. In this situation, it might be more effective for the donor to sell the property and realize the capital loss and then gift the proceeds to the recipient.
- Neither the lifetime exemption nor the annual gift tax exclusion is triggered if a donor pays a recipient’s tuition directly to an educational institution — other costs, such as room and board or books, are not excluded — or medical expenses directly to a service provider.
- Legally married couples may use gift splitting to effectively combine their exclusions, thus giving any recipient $36,000 instead of $18,000. This strategy comes with some restrictions:
- Each spouse must be a U.S. citizen or resident during the year in which the gift is made.
- Both spouses must consent to the gift-splitting arrangement. This must be elected formally using IRS Form 709 and the form must be refiled each year.
- The gift-splitting strategy applies to all gifts made in any year it is elected. In other words, every gift given that year by either spouse is treated as if it were made by both.
- Gifts may not be made to or for the benefit of the other spouse.
- In the event a gift is taxable, the donor will be taxed unless the parties agree that the recipient will bear the gift tax liability.
Form 709
The IRS requires Form 709 for marital gift splitting for all gifts exceeding the annual exclusion limit or for certain types of gifts, such as those made to a trust. Form 709 is due by April 15 of the year following the gift — that is, at the regular tax filing deadline. Donors filing an extension may also extend the due date for Form 709.
Form 709 allows the IRS to track gifts that count toward the lifetime gift and estate tax exemption. In that way, when a taxpayer’s cumulative reportable gifts exceed this exemption, the IRS knows that gift tax is due.
It is fairly straightforward to know when a cash gift has exceeded the annual exclusion limit. However, when assets other than cash are involved, those assets must be assigned a value. Form 709 states that the value of a noncash gift is the fair market value on the date the gift is made. In many instances, a qualified appraisal may be needed.
Other considerations
In community property states, assets acquired during marriage are generally considered jointly owned. If a gift is made from community property, it is typically treated as if half the gift comes from each spouse. This arrangement can simplify tax calculations, as each spouse’s gift tax exclusion can be applied without needing a formal gift-splitting election, i.e., without filing Form 709.
Gifts or bequests from nonresidents or foreign estates must be reported on IRS Form 3520. There are some instances in which tax will be due.
U.S. expatriates, particularly those classified as “covered expatriates” under tax law, can trigger additional tax implications on gifts or bequests they make to U.S. citizens or residents. These transfers may incur a special expatriate transfer tax, which requires the recipient to pay tax on the gift or bequest.
When it comes to making gifts, it is best to consult a tax professional before taking any action.
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