A Guide for Understanding the U.S. Federal Gift Tax Rules

Introduction: In the United States, individuals who give substantial gifts to their loved ones may encounter the federal gift tax. The federal gift tax is imposed on the transfer of property from one person to another without receiving full payment in return. This blog post will delve into some of the intricate details of the U.S. federal gift tax rules, including exemptions, rates, annual exclusions, and strategies to minimize tax liability.

1. What is the Federal Gift Tax? The federal gift tax is a tax levied on the transfer of property, either in cash or other assets, without receiving anything of equal value in return. The tax is imposed on the donor, not the recipient.  It is separate from the estate tax, which is imposed on the transfer of property at death. The purpose of the gift tax is to prevent individuals from avoiding estate taxes by giving away their assets before death.

2. Gift Tax Exemptions. Fortunately, not all gifts are subject to the federal gift tax. The following exemptions can help guide whether your gifts are taxable or not:

• Annual Exclusion: Each year, you can give a certain amount of money or property to an individual without incurring any gift tax. For 2023, this annual exclusion amount is $17,000 per recipient. Married couples can combine their exclusions, effectively doubling the amount to $34,000.
• Lifetime Exemption: In addition to the annual exclusion, you have a lifetime gift tax exemption which shields a certain amount from the gift tax. The lifetime exemption for 2023 is $12.92 million per individual. This means you can give away up to $12.92 million over your lifetime without incurring any gift tax. However, any gifts exceeding the annual exclusion reduce the available lifetime exemption and must be reported on a federal gift tax return (IRS Form 709).

3. Gift Tax Rates: If your gifts exceed the annual exclusion and the remaining lifetime exemption, you are subject to paying the federal gift tax. The top gift tax rate is currently 40%. It is essential to consult with a tax professional for specific guidance on calculating and paying the gift tax owed.

4. Some Strategies to Minimize Gift Tax Liability:

• Spousal Gifts: Gifts made to your spouse who is a U.S. citizen are generally not subject to the gift tax. However, there are specific rules if your spouse is a non-U.S. citizen or if the gifts are not outright to your spouse.
• Charitable Gifts: Transfers to qualified charitable organizations are exempt from gift tax. By donating to charities, you can reduce your taxable estate while making a positive impact.
• Educational and Medical Gifts: Payments made directly to educational institutions for tuition or directly to medical providers for someone else’s medical expenses are exempt from gift tax.
• Gift Splitting: Married couples can “split” their gifts, even if the assets belong to only one spouse. This allows them to utilize both spouses’ annual exclusions and lifetime exemptions more effectively.Irrevocable Trusts: Establishing an irrevocable trust can be a useful strategy for transferring assets while minimizing gift tax liability. Consult with an estate planning attorney to understand the intricacies involved.

Conclusion: The U.S. federal gift tax rules are complex, but with careful planning and understanding of the exemptions and strategies available, you can navigate this tax system successfully. Consult with a qualified tax professional or estate planning attorney to ensure compliance and optimize your gifting strategy. By being knowledgeable about the rules, you can make generous gifts to your loved ones while minimizing any potential gift tax liability.

Article by Shyla R. Buckner
Sprouse Shrader Smith PLLC
Posted July 2023