Gifting Large Sums of Money: What You Need To Know

A gift is a gift, right? Not necessarily. True to form, the IRS must have its hand in every pot, including that which contains your monetary gifts. While the agency won’t come after you for gifting $20 here and $50 there, it will raise a brow when your gifts begin to soar into the thousands. Once your gifts hit tens of thousands of dollars, the service may demand a cut. So that you are gifting legally — and, ideally, in a tax-free manner — it’s crucial to understand federal gift tax rules.

Annual Federal Gift Tax Limit

The truth is that few people ever owe the IRS a gift tax. Why? Because the annual limit is extraordinarily high and calculated on a per-person basis. For instance, as of 2022, the annual gift tax limit is $16,000 per recipient. In other words, you can gift up to $16,000 in cash and assets to as many people as you want per year without incurring a gift tax or violating federal tax rules. If you are married, you and your spouse may each gift up to $16,000 per recipient, meaning each recipient may receive up to $32,000 per year from your shared estate.

What if you should happen to exceed the annual federal gift tax limit, though? In this case, you will have to disclose your gifts and their amounts to the IRS via the appropriate tax form. The IRS will then tax you anywhere between 18% to 40% of the total gift amount.

Lifetime Gift Tax Limits

In addition to annual limits, the IRS also maintains lifetime gift tax limits. The lifetime aggregate gift tax limit is $12.06 million. What this means is that you can gift up to $12.06 million in your lifetime without incurring a tax penalty. You can give away this amount throughout your lifetime or all at once — such as upon your death bed — and never have to pay taxes on the gift.

There is more to this exemption, though. Say that you wanted to gift up to $20,000 per recipient in any given year. Per federal law, you can exclude up to $16,000 per recipient with your annual exemption. You can then use your lifetime exemption to exclude the remaining $4,000 for each recipient. It is important to note that only that $4,000 will apply toward your lifetime exclusion amount and not the full $20,000. Given this information, there is little chance you will ever have to pay taxes on a monetary gift.

How the IRS Calculates the Gift Tax

Say you are one of the few who makes gifts that exceed both the annual and lifetime exemption amounts. How does the IRS calculate the tax rate per gift?

The answer is simple: It calculates a percentage of the gift amount. The lower the amount of the gift, the lower the tax rate. For instance, the IRS will tax a gift that exceeds the exemption amounts by between $0 and $10,000 at 18%. On the other hand, it will tax a gift that exceeds the exemption amounts by between $501,000 and $750,000 at a rate of 37%.

Gifts That Are Safe From Taxes

There are some “gifts” that are exempt from gift taxes entirely, regardless of how much you contribute. Gifts that the IRS does not consider gifts are as follows:

  • Charitable donations
  • Any money given to dependents
  • Any money given to spouses who are U.S citizens
  • Political donations
  • Tuition payments made on behalf of someone else
  • Payments made toward health insurance or medical care on behalf of someone else

Of course, there are rules for how you go about giving these kinds of “gifts” as well, which is why it’s important to consult with an expert before gifting any amount of money for any purpose.

Federal gift tax rules are lenient. However, failure to understand them could result in a hefty tax bill for you or your loved ones. Avoid costly mistakes by brushing up on IRS rules sooner rather than later.