If you recently received a sizable gift from Mom and Dad, don’t fret about the gift tax. The IRS generally holds the giver liable for taxes. And unless the person is handing over a small fortune, he or she won’t owe any gift taxes either. But if your parents are being generous, you might want to fill them in on how the IRS views the transfer of money. This article will help you understand all about the gift tax, but since rules behind calculating gift tax can be complex, your parents should find a financial advisor if their gift might trigger a tax bill.
What Is the Gift Tax?
The IRS may impose a gift tax on someone who transfers money or property to another person without getting something of at least equal value in return. However, that action depends on the amount. The IRS basically ignores gifts that don’t breach the annual gift tax exclusion.
For the tax year 2023, an individual can give up to $17,000 per person without informing Uncle Sam. In 2024, that limit rises to $18,000. But even if your parent breaches the annual exclusion limit, he or she may just need to file some paperwork. Your parent generally won’t owe an actual out-of-pocket tax payment unless gifts for the year push him or her beyond their lifetime gift tax exclusion limit, which stands at $13.61 million for the tax year 2024 (up from $12.92 million in 2023).
This means your parent could give $18,000 to you and any other person in 2024 without triggering a tax. But let’s say your dad gives you $20,000 after your wedding. At this point, he made a taxable gift. But it doesn’t necessarily mean he has to write a check to the IRS that year because of his gift. However, he has to file a gift tax return and fill out IRS Form 709.
The government requires this in order to keep track of your parent’s lifetime gift tax exclusion. That’s where many people get confused. But the rules are pretty straightforward. Let’s break it down.
How Does the Lifetime Gift Tax Exclusion Work?
For tax year 2023 (which you will pay in 2024), the lifetime gift tax exclusion was a hefty $12.92 million for individuals and $25.84 million for married couples filing jointly.
You can think of the annual gift tax exclusion as adding to the lifetime gift tax exclusion. So let’s say Mom gave you a total of $28,000 in gift money in 2024. She has to file IRS Form 709 to file the gift because she used up her $18,000 annual exclusion for the year. But she likely won’t owe any taxes on that gift. The excess amount ($28,000-$16,000=$10,000) simply reduces her lifetime gift tax exclusion amount.
This translates to $13.61 million – $10,000. So she can continue making gifts and only worry about some extra paperwork. Unless she’s going to give past the gift tax exclusion threshold over her lifetime, she’s in the clear.
What Is the Gift Tax Exclusion for 2024 (Filed in 2025)?
The IRS recently announced that the annual gift tax exclusion for tax year 2024 will increase to $18,000 for individuals and $36,000 for married couples filing jointly. The lifetime gift tax exclusion also rises to $13.61 million ($27.22 million for married couples filing jointly).
It’s important to note, however, that the lifetime gift tax exclusion wasn’t always that high. It rose dramatically following the signing of the Tax Cuts and Jobs Act (TCJA). Often known as the Trump Tax Plan, these tax cuts are scheduled to expire at the end of the year 2025.
Nonetheless, some lawmakers are pushing to make them permanent. Still, political changes may impact the provisions of this massive tax overhaul before then. So it’s important to keep track and seek the help of a financial advisor or tax professional when dealing with gift-tax matters.
What Doesn’t Count Toward the Gift Tax?
The IRS never taxes some specific transfers of cash or property regardless of amount. You can avoid gift taxes when making gifts toward the following:
- Spouse
- Political organizations
- Tuition and medical expenses on behalf of someone else
When paying for someone’s tuition or medical bills, it’s best to forward those payments directly to the institution to avoid any hassles with the IRS. So if you have a tuition bill coming in and your parents want to cover it, simply tell them to send the money directly to the school. If they forward it to you first, they’d likely have to fill out some extra paperwork. They may also reduce their lifetime gift tax exclusion when they could have easily avoided it.
Who Pays the Gift Tax?
If a gift triggers an actual tax bill from the IRS, the person responsible for paying it would be the donor. In rare cases, the IRS may levy the gift tax on the recipient if the donor decides not to pay it. Nonetheless, there are several ways the affluent can avoid the gift tax. These include careful estate planning strategies, utilizing the right trust and taking advantage of the exclusions for giving money to students. These can prove especially handy if your parents are investing in a 529 college savings plan for you.
How Much Is the Gift Tax?
In the event your parents do owe out-of-pocket gift taxes to the IRS, the rate usually stretches from 18% to 40%. However, the IRS sets some specific rules and allows some exceptions when it comes to handling gift taxes. Your parents can learn more about how this impacts their specific situation by reviewing the instructions on IRS Form 709.
How to Avoid the Gift Tax?
If your parents are investing in a 529 plan to fund your college education, they can take advantage of gift tax exclusions unique to these savings vehicles.
As long as they make a special election, your parents can make a lump sum contribution toward a 529 plan up to five times the annual gift tax exclusion while avoiding gift tax. That limit is $90,000 ($180,000 if married filing jointly) for tax year 2024. The special election means your parents ask the IRS to treat this contribution as if they made it evenly throughout five years.
So, let’s say your single parent contributed a lump sum of $90,000 to your 529 plan in 2024. This triggers the gift tax. But because it was made toward a 529 plan, the IRS can treat it as $18,000 made over five years. Therefore, your parent avoids breaching the annual gift tax exclusion. As a result, the 529 plan contribution of $90,000 generally won’t reduce their lifetime gift tax exclusion. The only condition is that your parent makes no more contributions toward the plan for the next five years.
They can request this on a federal gift tax return.
If your parent dies within that five year period, however, the IRS considers the remaining portions a part of the parent’s federal gross estate for tax purposes.
So say your parent elected the special five-year rule but dies during year two. The first two portions of the $85,000 lump-sum contribution ($17,000 x 2 = $34,000) won’t count toward your parent’s estate. The remainder ($51,000) will, however. In addition, some states have their own particular estate tax rules.
If your parent or parents need help taking advantage of the gift tax exemptions for 529 plans, a financial advisor or certified public accountant (CPA) can help.
Bottom Line
You most likely won’t owe any gift taxes on a gift your parents make to you. Depending on the amount, your parents may need to file a gift tax return. If they give you or any other individual more than $36,000 in 2024 ($18,000 per parent), they will need to file some paperwork. They generally won’t pay any out-of-pocket gift tax unless the gifts for the year exceed their lifetime gift tax exclusion. For the tax year 2024, that factor stands at a sizable $13.61 million ($27.22 million for married couples filing jointly). But if they do owe some gift tax, they may owe up to 40%.
Estate Planning Tips
- Estate planning can be a complicated financial terrain to navigate. However, a financial advisor can guide you and your parents through it with ease. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- While you most likely won’t owe tax on gifts from your parents, your parents may face a tax bill. However, they should explore different estate planning strategies to avoid gift and estate taxes or minimize the hit.
- If you received a gift from a parent who recently passed away, you should become familiar with the inheritance tax you may face.
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