Can You Gift Someone Money? Tax Rules to Know
Gifting money? Learn the essential IRS tax rules and guidelines to understand your obligations and maximize your generosity.
It is common for individuals to transfer money or assets to others, whether to family members, friends, or charitable organizations. While generally permissible, these transfers may sometimes have tax implications under federal gift tax laws. The Internal Revenue Service (IRS) imposes a gift tax on transfers of money or property for which the giver receives nothing of equal value in return. The purpose of these regulations is to prevent taxpayers from avoiding estate taxes by giving away assets during their lifetime.
Understanding the Annual Gift Tax Exclusion
The annual gift tax exclusion allows individuals to give money or property to any person each year without tax implications or reporting. For 2024, this exclusion amount is $18,000 per recipient. A giver can provide up to $18,000 to as many individuals as they wish annually, with no gift considered taxable. The annual exclusion amount is subject to inflation adjustments in subsequent years.
This exclusion applies to gifts of “present interest,” meaning the recipient has immediate use, possession, and enjoyment of the gifted property. Married couples have an expanded opportunity for giving, as they can combine their individual exclusions. By “gift splitting,” a married couple can give up to $36,000 to each recipient in 2024 without incurring gift tax or affecting their lifetime exclusions. It is important to understand that the gift tax liability rests with the giver, not the recipient.
When Gifts Exceed the Annual Exclusion
When a gift exceeds the annual exclusion, the excess is generally not immediately subject to gift tax. Instead, this excess amount reduces the giver’s lifetime gift tax exclusion. For 2024, the lifetime gift tax exclusion is $13.61 million per individual. This substantial exclusion means that most people will never pay federal gift tax during their lifetime.
The lifetime exclusion is unified with the federal estate tax exclusion, meaning gifts exceeding the annual exclusion reduce the amount passed on tax-free at death. For married couples, the combined lifetime exclusion for 2024 is $27.22 million. Only if cumulative taxable gifts surpass this amount will federal gift tax become due. The federal gift tax rate is a marginal rate, ranging from 18% to 40% on amounts exceeding the lifetime exclusion.
Specific Exemptions from Gift Tax
Certain types of transfers are not considered taxable gifts, regardless of their amount, and do not count against either the annual or lifetime exclusion. One such exemption applies to payments for qualified medical expenses. Direct payments to a medical provider for someone else’s medical care, including insurance, are exempt from gift tax. This exclusion applies even if the recipient is unrelated to the giver.
Payments for qualified educational expenses also have a specific exemption. Tuition paid directly to an educational institution on behalf of another person is not a taxable gift. This exclusion is limited to tuition and does not cover other educational costs like room, board, books, or supplies. To qualify, the payment must be made directly to the educational institution.
Gifts between U.S. citizen spouses are generally unlimited and tax-free due to the marital deduction, allowing transfer of any asset amount without gift tax implications. Special rules apply for gifts to non-U.S. citizen spouses, where an increased annual exclusion applies, which is $185,000 for 2024. Contributions made to qualified political organizations are also generally not considered taxable gifts.
Reporting Requirements for Gifts
When a gift exceeds the annual exclusion, the giver must report it to the IRS. This is done by filing Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. Form 709 must be filed even if no gift tax is immediately due, as the lifetime exclusion covers the gift. The primary purpose of Form 709 is for the IRS to track cumulative gifts that reduce the giver’s lifetime exclusion.
The Form 709 filing deadline is generally April 15th of the year following the gift. For instance, gifts made in 2024 would require a Form 709 to be filed by April 15, 2025. If additional time is needed, an extension can be requested via Form 8892, typically extending the deadline to October 15th. The form requires information such as the names and addresses of the donor and donee, a description of the gifted property, and its value.