In 2023, the annual gift tax exclusion from IRS is set at $17,000, which is the maximum amount you can give to an individual within a year without incurring gift tax. Gifts equal to or below the annual exclusion limit are exempt from taxes. Therefore, you don’t have to be concerned about paying gift tax on smaller presents, such as a sweater you purchased for your nephew during Christmas.
The IRS annual gift exclusion limit is applied per recipient, meaning it doesn’t restrict the overall value of gifts given in a year. You can present multiple $17,000 gifts to various individuals without limitation. However, you cannot give more than $17,000 to any single recipient in one year without tapping into your lifetime exemption. For married couples, both spouses can gift up to $17,000 to any one recipient, effectively increasing the combined limit to $34,000 in such cases.
What is the IRS gift tax and who is subject to it?
Gift tax, as the name suggests, is a tax levied on gifts given to someone. Typically, the gift giver, or donor, is responsible for paying the gift tax, if any is owed. In the absence of a prior agreement specifying otherwise, the person providing the gift bears the responsibility for the gift tax. In the context of gift tax, a gift is defined as any transfer of money, property, or other assets to someone without the expectation of repayment. This encompasses monetary gifts, interest-free loans, real estate, personal belongings, and intangible assets like stock options.
An item is also considered a gift if it is sold for less than its fair market value (FMV). FMV is the price at which an asset would reasonably sell in an open market. The difference between the FMV and the sale price is treated as a gift. For example, if your house has a fair market value of $250,000, but you sell it to a relative for $150,000, then you have effectively given a $100,000 gift ($250,000 – $150,000). In this case, you would need to file a gift tax return for the $100,000 gift.
