Q: I would like to make some cash gifts to friends and family members. I have heard that there is a limit on the amount of gifts I can make during the year. Is that true?
A: Each individual has a total lifetime exemption of $12,060,000 (in 2022) from lifetime gifts or estate tax at death. Gifts that exceed this amount will be subject to a 40% federal gift tax. That being said, the Internal Revenue Code does provide for an annual gift tax exclusion, currently $16,000 per donee. This means that you may give up to $16,000 per recipient each year without triggering a gift tax or using up your available exemption. This is probably the limit you have heard about. Married couples, too, can agree to “split” their gifts to take advantage of both exclusions, meaning one spouse can make gifts of up to $32,000 per donee each year.
Aside from the annual gift tax exclusion, certain gifts are entirely exempt from gift tax. If a donor makes a gift for the benefit of any other person that is paid directly to a provider for tuition or deductible medical costs, those gifts, in any amounts, will be free of federal gift tax.
For example, John Doe, who is married to Jane Doe, made the following gifts in 2022:
- $20,000 to child A as a wedding gift
- $450,000 to child B to purchase a new home
- $55,000 for college tuition for grandchild paid directly to Dartmouth College
All of the gifts exceed the $16,000 annual exclusion. Because John and Jane are married, they can agree to split all gifts in 2022.
- The gift to child A is not taxable because it is less than the combined annual exclusion of $32,000.
- The gift to child B is taxable. $32,000 will be excluded using the annual exclusion for both parents. The remaining $418,000 is taxable and each of John’s and Jane’s lifetime exemptions will be reduced by $209,000 with no gift tax due.
- The $55,000 gift is not taxable because it falls within the special exclusion for tuition paid directly to a qualified educational institution.
While this is a brief overview of a few exclusions and exemptions from gift tax, there are others. An experienced attorney can help you determine the best way to implement, and manage the tax implications of, your gifting.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to knowthelaw@mclane.com. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.