Gift tax and the annual exclusion
Also called Annual gift tax exclusion
A federal tax on large gifts made during life, owed by the giver, with an annual per-recipient exclusion and a lifetime exemption shared with the estate tax.
What it means
Each year a person can give up to the annual exclusion, an amount set by law and adjusted for inflation, to as many individuals as they like without reporting anything. A married couple can each give that amount to the same person. Gifts above the exclusion to one recipient require the giver to file a gift tax return, but tax is generally owed only after the giver’s lifetime exemption, shared with the estate tax, has been used up. The giver, not the recipient, generally files and owes any gift tax.
Some transfers do not count at all: tuition paid directly to a school, medical bills paid directly to a provider, gifts to a U.S.-citizen spouse and gifts to charity. Recipients do not owe income tax on gifts, but they generally take over the giver’s cost basis, so gifted assets do not get the step-up in basis that inherited assets receive.
Example
Suppose, with a hypothetical annual exclusion of $10,000 (not the actual figure), a parent gives a child $25,000 in one year. The $15,000 above the exclusion goes on a gift tax return and reduces the parent’s lifetime exemption, but no tax is due unless that exemption is exhausted.
How it’s used
- Helping children or grandchildren with money during life
- Paying a relative’s tuition or medical bills
- Shrinking a large estate through yearly gifts
Good to know
- Gifting appreciated assets passes along the giver’s cost basis, so for some assets inheritance can be more tax-efficient; state rules and personal situations vary.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.