The Tax Definition of a Gift
The IRS defines a “gift” as anything for which you don’t receive full consideration in return. You’ve given a gift of $100,000 if you sell a piece of property to your niece for $100,000, but the property had a fair market value of $200,000.
Annual Gift Tax Exclusion: 1997 to 2023
The gift tax exclusion increases every year or so. For tax year 2022, it’s $16,000. For tax year 2023, it’s $17,000. The annual gift tax exclusion was first indexed for inflation as part of the Tax Relief Act of 1997, so the amount can increase from year to year to keep pace with the economy, but only in increments of $1,000. The gift doesn’t have to be made in one lump sum. The tax will also come due if you cumulatively exceed the exclusion amount, such as if you give someone $2,000 a month for 12 months. You’d owe the gift tax on the difference between the total annual amount ($24,000) and the exclusion for that tax year.
Exceptions to the Gift Tax Rules
These rules don’t apply to everything and everyone. You can make unlimited gifts in the form of tuition, other qualified educational expenses, and medical expenses if you pay the learning institution or the care provider directly. They’re not gifts, and they don’t count against the exclusion amount if you pay schooling or doctor bills on someone’s behalf. Gifts to non-citizen spouses are capped each year. For tax year 2022, the cap is $164,000. For 2023, it’s $175,000. Similar to the annual exclusion for everyone else, you can give your non-citizen spouse this much per year without incurring a gift tax.
The Lifetime Exemption
The gift tax must be paid one way or another if you exceed the annual exclusion, but this doesn’t necessarily mean that you must hand over cash to the IRS. The U.S. tax code also provides for a lifetime exemption that allows you to effectively bump the tax over to another exclusion. This exemption is sometimes referred to as the “unified credit” because it shares its cap with the estate tax. For tax year 2022, the government said you can transfer up to $12.06 million in money or property tax-free to other individuals, either as gifts during your lifetime or from your estate at your death. For tax year 2023, this lifetime exclusion limit is $12.92 million. You can effectively assign any gifts that exceed the annual exclusion to this unified credit if you decide you don’t want to pay the gift tax in the year you go over the amount of the exclusion. If you were to give someone $920,000 in 2023, $12 million of the exemption—plus the annual exclusion amount—would remain to shield other gifts you give over the annual exclusion and your estate at the time of your death.
