There are popular misconceptions concerning limits and taxes applicable to gifts. I’ll get straight to the point: Unless you are very wealthy, there will be no tax of any kind associated with gifting.
Recipients of gifts never pay a tax on the gift under any circumstances. If there is to be a tax on a gift, it is paid by the estate of the donor when he dies.
Here’s how it works:
There is a federal estate tax which applies only to very wealthy people. It is calculated based on the wealth the donor owns at the time of death, plus the wealth he gave away while he was alive.
Why are gifts added? To close a loophole.
Imagine being worth $100 million and giving it all away on your deathbed to avoid paying taxes. The IRS isn’t going to have any of that. So, they count your gifts, too. However, they only count gifts to the extent they exceed the annual exclusion in the year given. This allows wealthy people to make fairly generous gifts each year and to also avoid a limited amount of estate taxes.
The 2024 annual gift exclusion is $18,000 per donee. If you give $100,000 to your child, you must report it to the IRS since it exceeds the exclusion. This doesn’t mean you will be taxed. It only means that in 2024, you gave $82,000 in value that will be taxed only if you are rich enough.
How rich?
The federal estate tax kicks in at $13.61 million for single individuals and $27.22 million for married couples. These figures are known as the “unified federal estate tax credit.” The excess $82,000 will only be taxed if you are over the unified credit when you die. Otherwise, it’s completely tax free.
The bottom line is that unless you are very wealthy, you can give it all away anytime you want, and nobody will pay any gift taxes. But be very careful when making gifts. You don’t want to lose a valuable step-up in basis. You can read about the step-up here.