During the holiday season, generosity often takes center stage as people look to gift loved ones financial support. Whether you’re giving a small cash amount or a larger sum, it’s important to understand the IRS rules for gift-giving, particularly around tax implications and reporting requirements.
The basics of gift taxes: Who pays what?
First, it’s essential to know that recipients of gifts do not have to pay taxes on the money they receive. In most cases, the responsibility for any taxes related to a gift falls on the giver, not the recipient. However, many gifts are entirely tax-free and don’t require reporting at all.
According to the IRS, gift-givers only need to file a gift tax return when the total amount gifted to a single person exceeds the annual exclusion limit in a given year. For 2024, that limit is $18,000 per recipient. This means you can give up to $18,000 to as many people as you want in a year without any need to report it to the IRS.
However, gifts exceeding the $18,000 threshold will require the giver to file IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
“The annual exclusion amount serves as a buffer,” explains a tax professional quoted in a blog post. “Most people don’t come anywhere close to needing to report their gifts because the IRS sets this limit generously high.”
Annual gift tax exclusion for 2024
The annual exclusion limit is a specific dollar amount the IRS allows you to gift tax-free to an individual within one calendar year. For the 2024 tax year, this limit is $18,000 per recipient. This means:
- If you give your adult child $5,000 and your grandchild $10,000, you’re still under the $18,000 limit for each recipient, and no reporting is needed.
- If you give your child $20,000, you’ll need to file Form 709 to report the $2,000 excess amount (the amount over the $18,000 limit).
Importantly, the annual exclusion limit is per donor and recipient. This means a married couple can each give up to $18,000 to the same individual for a combined total of $36,000 without any reporting requirements.
What is IRS Form 709 and when is it required?
IRS Form 709 is used to report gifts that exceed the annual exclusion amount. This form is a way for the IRS to track gifts over a lifetime and to calculate whether the giver may eventually owe federal gift taxes.
Here’s when you would need to file Form 709:
- If you give more than $18,000 to any single person in 2024.
- If you give future interest gifts (e.g., gifts that the recipient cannot immediately access).
- If you’re splitting a gift with your spouse to exceed the annual exclusion limit.
- If you give a portion of community property or jointly-owned assets.
Although Form 709 must be filed when gifts exceed the annual limit, most people will not owe taxes on their gifts. That’s because the IRS allows a lifetime gift and estate tax exemption, which is currently set at $13.61 million per individual as of 2024.
According to IRS guidelines, “You only owe federal gift taxes when your cumulative lifetime gifts surpass the lifetime exemption amount.” In practical terms, this means the vast majority of taxpayers will never owe gift taxes.
The lifetime gift and estate tax exemption
The lifetime gift tax exemption is the total amount of gifts you can give over your lifetime before incurring federal gift taxes. In 2024, this exemption is $13.61 million for individuals (or $27.22 million for married couples).
Here’s how it works:
- Gifts exceeding the $18,000 annual exclusion are subtracted from your lifetime exemption.
- For example, if you give your child $25,000 in 2024, the $7,000 excess amount will be deducted from your $13.61 million lifetime limit.
Only after you’ve given away more than $13.61 million will federal gift taxes come into play. This exemption also integrates with estate taxes, meaning any unused portion of the $13.61 million can be applied to your estate when you pass away.
For those with significant wealth, it’s wise to consult an estate planning attorney to ensure gifts are structured strategically.
Special gift scenarios: education, medical, and charitable gifts
Some gifts are exempt from the gift tax rules entirely, regardless of their value. These include:
- Educational gifts: Payments made directly to an educational institution for someone’s tuition are not subject to the annual gift tax exclusion. Note that this only applies to tuition, not related expenses like books or housing.
- Medical gifts: Payments made directly to a healthcare provider or medical insurance company for someone’s medical expenses are also tax-free.
- Charitable gifts: Donations to qualified charitable organizations are tax-deductible and do not count toward the annual exclusion limit.
According to Forbes, “Direct payments for education or medical care are a common strategy for grandparents or other relatives who want to help without affecting their gift tax limits.”
What happens if you don’t file Form 709?
If you fail to file Form 709 when required, the IRS may impose penalties and interest on any taxes due. While most gifts won’t trigger a tax liability, failing to report gifts over the annual exclusion could still create compliance issues.
Proper filing is crucial for those giving large sums or planning to exceed the lifetime exemption to avoid unnecessary headaches.
