What is the Gift Tax and Who Pays It?

While the common saying is “there’s no such thing as a free lunch,” some might argue that there is no such thing as a free gift. What is the Gift Tax, and who pays it?

The gift tax is a federal tax applied to the transfer of money or property from one person to another, without the donor receiving anything of similar value in return. The gift tax was created to prevent individuals from lowering their tax bills by giving away assets as “gifts.”

In 2023, each individual (donor) may gift up to $17,000 to each donee (person receiving the gift) without using the donor’s estate and gift tax exemption. This amount is indexed annually for inflation. Any amount a donor gifts in excess of $17,000 per individual donee will use the donor’s estate and gift tax exemption and must be reported on a gift tax return. Any amount of a gift in excess of $17,000 per individual is applied toward the donor’s estate and gift exemption. In 2023 the estate and gift tax exemption is $12.92 million, but that number also is adjusted every year. If you surpass the $12.92 million in lifetime gift exemptions to an individual, the excess will likely trigger gift tax.

Certain situations exist where gifts may not use the donor’s estate and gift tax exemption. If the donor is paying for the donee’s medical expenses directly to the medical provider, or the donor is paying certain tuition expenses directly to a university, then these gifts will likely not use the donor’s estate and gift tax credit.

Gifting can be complicated. Before making a gift, speak to the gift tax lawyers at Brown Law Firm. They can help you find the best way to transfer gifts while taking into consideration your various goals and objectives. To schedule an appointment, call (303) 339-3750.