Ask Phil: What are Gift Taxes?
Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses gift taxes, including how they work and who is responsible for paying them.
The government imposes gift taxes on the transfer of property, money, or assets from one person to another without receiving something of equal value in return. These taxes are typically levied to prevent individuals from avoiding estate taxes by giving away their assets before they pass away.
The person responsible for paying gift taxes is generally the person making the gift (the donor), not the person receiving the gift (the donee). In 2023, you can give up to $17,000 each year to as many people as you want without incurring gift tax. Gifts within this annual exclusion amount do not require you to report or pay gift tax.
In addition, the lifetime gift tax exemption allows you to make larger gifts without paying gift tax. However, once you exceed this exemption, you’ll be required to pay gift taxes on the excess amount. As of 2023, the lifetime gift tax exemption is about $13 million per person.
Once you reach either of these thresholds, a giver will be responsible for paying gift taxes. This tax can range from 18% to 40% depending on the taxable amount. In addition, if you give over the current $17,000 limit, you will need to file a gift tax return. This r formally known as the United States Gift (and Generation-Skipping Transfer) Tax Return.
Given these thresholds, it can be fairly simple to avoid the gift tax. However, certain actions can trigger the gift tax. These include unpaid loans to friends and family or excess contributions to a 529 savings plan. Be sure to speak with a knowledgeable tax professional if you’re unsure about how to properly gift your assets.
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