Annual exclusion gifts are usually in the forms of cash, stocks, bonds, portions of real estate, or forgiving debt on a family loan in an amount that doesn’t exceed the annual gift tax exclusion. The federal government sets the allowable limits for tax-free giving each year. When you give someone a gift with a value of less than the exclusion limit, you don’t need to pay taxes on it. However, if your gift is over the limit, you’ll need to report the amount that exceeded the limit on IRS Form 709. Each person is given a separate annual exclusion amount to gift under U.S. tax law. They can give this amount to an unlimited number of people (family members and non-family members alike) during the year. For example, you can give any number of people a gift of $16,000 in 2022 without incurring any tax penalties. Married couples can combine their annual exclusion amounts, but gifts split between the husband and wife must be reported to the IRS on Form 709.
An Example of Annual Exclusion Gifts
Suppose that during 2022, you and your spouse, who are both U.S. citizens, make the following gifts:
Gifts That Don’t Require Reporting
You have made total gifts of $62,000 in 2022. Fortunately, all the gifts qualify as annual exclusion gifts or are not taxable per the unlimited marital deduction. The $10,000 to Khaled and the $2,000 to Gisele qualify for the annual exclusion, and a total of $50,000 to your spouse qualifies according to the unlimited marital deduction.
Gifts That Require Reporting
On the other hand, your spouse has made total gifts of $70,000 in 2022 that may or may not qualify as annual exclusion gifts: A total of $20,000 to Regina exceeds the $16,000 annual exclusion limit, while a total of $50,000 to you qualifies for the unlimited marital deduction. What about the $20,000 to Regina? Will $4,000 of the $20,000 given to her be considered a taxable gift or not? This will depend on two factors:
How the account(s) where the money came from was(were) titled, andWhether or not you agree to split the gifts with your spouse.
You and your spouse can agree to split the $20,000 gift to avoid taxes. To do so, you’ll both need to report the split gift to the IRS using Form 709. If you do not agree to split the exemption on Regina’s gift with your spouse, your spouse will need to report a $4,000 taxable gift to the IRS using Form 709.
