A gift money tax is a federal tax that you pay when you give someone something of value without expecting anything in return. This can include monetary gifts, assets like houses or cars, and even extending an interest-free loan. Generally, the IRS taxes a gift based on its fair market value (the price it would sell for on the open market) rather than what you paid for it or its original cost to you.
The good news is that most people won’t have to worry about gift taxes unless they are giving away a large amount of money or property. The reason is that the IRS has generous lifetime and annual exemption amounts for gift taxes. In addition, the tax is only paid by the giver, not the recipient.
For example, the yearly exemption for gift taxes is $15,000 per recipient in 2022 and $17,000 in 2023. A married couple can give each other up to $17,000 per person each year. Anything above this threshold will need to be reported on a Form 709.
If you are not concerned about reaching these limits, you can generally avoid gift taxes by establishing trusts to hold the assets you want to give away. You can also use the gift tax calculator on the IRS website to help estimate your potential liability.
While the gift tax is a bit complicated, it’s generally easier to understand than estate or income taxes. The calculator allows you to input your filing status and the value of all the gifts you have made over a given period. You can then see the total value of all your taxable gifts, how much you owe in gift taxes, and what rate you will be charged.
A word of warning: if you are worried about your ability to meet these exemptions, it’s always a good idea to consult with a qualified tax professional before making any major gifts. A Ramsey Trusted Local Provider can take the time to get to know you and your financial situation and recommend specific strategies that will minimize your tax liability.
The gift tax is a great way to protect your loved ones from excessive wealth inequality, but you have to be careful how you do it. It’s easy to make mistakes, so you should consider enlisting the help of an experienced tax attorney. If you need one, Rocket Lawyer network member attorneys are ready to provide affordable legal advice to help you navigate the tax code. They can also help you create a comprehensive plan to ensure that your assets are protected and distributed according to your wishes. Find an ELP near you by entering your zip code below. You can even connect with an attorney in a matter of minutes using our free online matchmaker tool. Just choose a topic that you need help with and we’ll connect you with an ELP who is a Ramsey Trusted Advisor. You can then schedule a call or an appointment to discuss your specific situation.