Yeah! My big brother gave me a super nice check! Is it just enough for dinner, or something more considerable? Either way, do I have to pay taxes on things like gifts? At The Ray Group, clients ask us if gifts they have received need to be reported as income on their taxes. Usually, it’s substantial amounts given to them by a wealthy relative.
Like most things IRS-related, the answer depends on several different factors. In this blog post, we’ll explain when gifts should be reported to the IRS as income and if you have to pay taxes on certain types of gifts.
Annual Gift Tax Amount For 2023
Before you spiral out of control, you should know that the IRS even notices, the total gift amount must be quite considerable. So, if the value of the gift is $17,000 or less in a calendar year, it doesn’t count. Per the IRS, this amount is called the ‘annual gift tax exclusion’.
Here’s an example. If a married couple makes a gift from joint property, each of them can gift up to the annual exclusion. This means that your brother and his wife could give you $34,000 in 2022 without being concerned about paying any gift tax.
As you might have guessed, the gift tax exists to deter people from giving away their money in an effort to avoid paying their income taxes. Depending on the size of the gift, the tax rate fluctuates from 18-40%.
For example, if you give someone a gift valued between $750,001 and $1,000,000, the marginal gift tax rate would be 39%. But if you give someone a gift worth between $20,000 and $40,000, the marginal gift tax rate is 22%.
Do I Have To Pay Taxes On Gifts?
While there are many exceptions, all gifts can be taxable. The receiver of the gift usually do not have to pay the gift taxes. But the person who gives the gift must report it on their tax return, if necessary, and pay gift taxes due.
However, the IRS may seek to collect the gift tax from you if the donor does not pay it. Generally speaking, those can afford to make gifts large enough for the IRS to take a look can also afford to pay the gift taxes.
What Is The Lifetime Exclusion Amount For Gift Tax?
In 2023, you can gift up to $17,000 per person without the gift contributing to your lifetime exclusion of $12.92 million. However, in 2026, the lifetime exclusion amount is set to drop back down to around $5 million per recipient. But most people will still not exceed this amount.
In short, you will need to give away over $12.92 million in your lifetime before you have to pay taxes on gifts you give.
I Exceeded The Annual Exclusion Limit. How Do I Report Gifts On My Tax Return?
If you need to report gifts on your tax return due to surpassing the annual exclusion limit, use IRS form 709. Remember, this doesn’t mean you’re paying gift tax; it just means you’re reporting the monetary gift or the value of a tangible gift.
If you are still not sure whether you have to pay taxes on gifts, just give us a call at (951) 296-0785, we’ll be happy to answer your questions.
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