GIFT TAXES: 4 Important Rules, 4 Mistakes to Avoid
If you’re so lucky to be giving and/or receiving “gifts” with BIG monetary value, you’re going to want to know the tax rules and common mistakes to avoid.
4 Important Rules:
Annual Limit: You can give $18K per year in 2024 ($36K if you’re married) to as many individuals as you want, and you generally won’t be required to pay any gift taxes.
IRS Form 709: If you exceed the annual limits (above) then you have to file tax Form 709 to let the IRS know, but you still probably won’t have to pay any gift taxes.
Lifetime Exemption: There is a lifetime gift tax exemption of $13.61 million in 2024 (2x for married couples), but once you exceed that amount, you have to pay taxes on the gifts. The gift tax rate starts at 18% and climbs to 40% for gifts over $1 million (see table below). And the $13.61 million lifetime exemption reverts back to $5 million in 2026 if Congress doesn’t act.
Who Pays the Gift Tax? The giver of the gift pays it. Not the recipient. Just know that if someone gifts you stock (that they acquired years ago for $10) and you sell it (for $50) you pay income tax on the gain of $40 (Note: the rules are different if you receive the stock through an estate, then your cost basis is the mkt value of the stock on the day the previous owner died: this is the “stepped up cost loophole.”
4 Mistakes to Avoid:
You’re going to want to discuss your personal situation w/ your tax advisor first, but generally speaking, here are a few mistakes to avoid:
1. Gift the money before 2026: If you’re closing in on the $13.61 million lifetime exemption, you may want to consider gifting BEFORE the limit reverts back to $5 million in 2026 (although the gov will likely extend the higher exemption before then as a deal sweetener for some other gov money grab tbd at a later date). But there is no guarantee the higher limit gets extended.
2. Spread the gift out over multiple years. To avoid Form 709, you may want to consider spreading out large gifts (above $18K) over multiple years.
3. Don’t forget some states have estate taxes: Some states (such as New York, Illinois, and a handful of others) have their own estate taxes that kick in well below that $13.61 million federal exemption. For example, Illinois (the state I live in) kicks in for estates over $4 million and rises to 16% for estates over $10 million—yuck!
4. Don’t get sneaky: It’s not just cash that counts as a gift. Gifts can include cars, wedding expenses, vacations, loans (with no interest) and almost anything with value. However, there are exceptions (no gift tax) on tuition and medical expenses you pay for someone, as well as no tax on gifts to your spouse and gifts to a political organization. Also, gifts to qualifying charities are not taxed and may even be tax deductible.
The Bottom Line:
By knowing the gift tax rules, you can use them to your advantage and avoid costly mistakes. Be smart people!