Gift Tax Laws: An Overview

Gifts occupy a unique and cherished role in our lives as powerful symbols of affection and generosity. Yet, beyond the sentimental values lies a complex web of legal considerations known as gift tax laws. Gift taxes play a pivotal role in the United States tax system, designed to ensure fairness and prevent the undervaluation of wealth transfers. As of 2023, the IRS announced that the annual gift tax exclusion would increase to $17,000, and the lifetime exemption would follow suit, rising to $12.92 million. Understanding and staying current on these laws is essential for those seeking to make substantial gifts while minimizing the potential tax liabilities. 

This article will explore the fundamental principles governing gift taxes, including annual exclusion, lifetime exemption, and tax rates. We'll also discuss essential concepts like gift splitting, gift tax returns, and the often-misunderstood notion of gift tax exemption portability. By equipping yourself with the knowledge needed to understand how gift taxes work in the United States, you can ensure that your gifts bring joy to your loved ones while maintaining compliance with the laws that govern them.

Annual Gift Tax Exclusion

Each individual can give a certain amount of money or property as gifts to others without incurring gift tax. The annual gift tax exclusion for 2023 is $17,000 per recipient. The annual exclusion applies to each recipient separately, meaning that if you give $17,000 or less to multiple people in a calendar year, you won't owe any gift tax or need to file a gift tax return. 

Regardless of their value, the following types of gifts are excluded from the gift tax:

Gifts for Qualified Education Expenses

You can make direct payments to qualified educational institutions on behalf of an individual without incurring gift tax consequences. These payments must be for tuition expenses only and made directly to the educational institution. There is no dollar limit for this exclusion, but it applies only to tuition and not to other education-related expenses like room and board, books, or supplies.

Gifts for Medical Expenses

Similarly, you can make direct payments for someone else’s medical expenses without incurring gift tax. The payments must be made directly to medical providers or institutions and cover medical costs that qualify for the medical expense deduction on income tax returns. There is no dollar limit for this exclusion, and it only applies to the payment of medical expenses.

Lifetime Exemption

In addition to the annual exclusion, there is a lifetime gift tax exemption. This exemption allows a person to give a certain amount of money or property over their lifetime without incurring gift tax. For 2023, the lifetime gift tax exemption is $12.92 million per person. 

This unified exemption covers both gift and estate tax, meaning that any portion of the exemption used during your lifetime for taxable gifts reduces the amount available to offset potential estate tax upon your death. For example, if you use $2 million of your lifetime exemption for taxable gifts, you will have $10.92 million remaining to offset estate tax. 

It's important to note that if the total value of your gifts to any person in a calendar year exceeds the annual exclusion amount of $17,000, you must file a gift tax return with the IRS. However, you generally will only owe gift tax if you have used up your lifetime exemption. 

Gift Tax Rates

If the value of your gifts to any individual in a calendar year exceeds the annual exclusion amount of $17,000, you must file a gift tax return with the IRS. However, you'll only owe gift tax if you have exceeded your lifetime gift tax exemption of $12.92 million. 

Gift tax rates range from 18% to 40% and are applied to taxable gifts that exceed the lifetime exemption. The more money that you give, the higher the applicable tax rate.

It’s important to remember that any gift you give that falls under the annual exclusion amount of $17,000 will not incur gift tax. The annual exclusion is separate from the lifetime exemption and does not impact the gift tax rates.

Gift Splitting

Married couples can take advantage of gift splitting, which allows them to combine their annual exclusions and give up to $34,000 to an individual in a calendar year without incurring gift tax. Gifts are typically split equally between spouses. 

To take advantage of gift splitting, a married couple must file a gift tax return to report the split gifts, even if no gift tax is owed. The return should indicate the consent for gift splitting and provide the necessary details of the contributions made by each spouse. 

It is worth mentioning that gift splitting does not affect the individual lifetime gift tax exemption of $12.92 million as of 2023. Gift splitting only impacts the annual exclusion, allowing for more significant tax-free gifts within the confines of the annual exclusion amount.

Gift Tax Exemption Portability

In cases where one spouse is deceased, gift tax portability allows the surviving spouse to utilize any unused portion of the other spouse's lifetime gift and estate tax exemption. This provision can help maximize the available exemption for married couples. 

To claim the unused portion of the deceased spouse's exemption, the estate must file an estate tax return with the IRS, even if no estate tax is owed. This return calculated the amount of unused exemption that can be transferred to the surviving spouse. 

Gift Tax Returns

If you make gifts during a calendar year that exceed the annual exclusion amount, you are generally required to file a gift tax return, also known as Form 709. The filing requirement is triggered when the total value of your gifts to any individual exceeds the annual exclusion. The return requires detailed information about the gifts made, including the recipient’s name, relationship to the donor, description of the gifted property or money, and the fair market value of the gifts.

Cumulative Reporting

Gift tax tracks the cumulative value of your lifetime taxable gifts, including those subject to gift tax and those that exceed the annual exclusion. Each year's return adds to the cumulative total, which is vital for determining any potential gift tax liability.

Calculation of Tax Liability

Gift tax returns calculate the potential tax liability based on the cumulative taxable gifts made during your lifetime. The gift tax rates, ranging from 18% to 40%, are applied to the taxable gifts that exceed your $12.92 million lifetime exemption as of 2023. 

Filing Deadline

The deadline for filing a gift tax return is usually April 15, following the calendar year the gifts were made. However, if you are granted an extension to file your income tax return, the deadline for the gift tax return will align with the extended due date.

What Happens If I Don’t Pay Gift Tax?

If you’re required to pay gift tax but fail to do so, there may be inevitable consequences. Although this can vary depending on your circumstances, here is what generally happens if you don’t pay gift tax.

Penalties and Interest

The IRS may assess penalties and interest on the unpaid gift tax amount. The penalties can be significant and can accumulate over time. The specific penalty rates depend on various factors, including the duration of the non-payment and the reasons for non-compliance. 

Tax Lien

The IRS can place a tax lien on your property to secure the unpaid gift tax debt. A tax lien is a legal claim against your property, and it can negatively affect your creditworthiness and make it difficult to sell or transfer the affected assets. 

Collection Efforts

The IRS has various methods to collect unpaid gift tax, including levying bank accounts, garnishing wages, or seizing assets. These collection efforts can be disruptive and significantly impact your financial situation. 

Legal Action

In severe cases of non-payment or non-compliance, the IRS can pursue legal action, such as filing a lawsuit, to collect the unpaid gift tax. This can result in additional legal expenses and potentially more severe consequences.

Do I Need a Tax Attorney if I Didn’t Pay Gift Tax?

Tax laws can be complex, and the consequences of not paying gift tax can have long-term implications. Consulting with a tax attorney can provide personalized guidance and support tailored to your specific situation, helping you navigate the complexities of the tax system and protect your rights and interests.

In addition to addressing your current unpaid gift tax situation, a tax attorney can assist you with tax planning to minimize future tax liabilities. They can guide you on structuring gifts, estate planning, and other strategies to optimize your tax situation while ensuring compliance with tax laws. 

To find a reputable tax attorney near you, visit our lawyer directory, which is searchable by metro area. We've conducted thorough research, handpicking a selection of top-rated lawyers renowned for their expertise and dedication to tax law. With our searchable directory, you can easily find the right legal professional to guide you through your unpaid gift tax situation and help you develop a better tax plan in the future.