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When a Gift May Not Be a Gift

When a Gift May Not Be a Gift

It is better to give than to receive. But if you give a gift above a certain amount, you might end up owing money to the Internal Revenue Service (IRS).

The federal tax code has very specific rules about how much you are allowed to transfer to others each year—and over the course of your lifetime—in the form of a gift. Any gifts above that amount may be subject to gift tax, which is paid by the giver. However, not every gift is subject to gift tax. There are annual exclusion amounts, a lifetime exemption amount, and other exclusions, such as education or medical exclusions, that relieve a giver of paying federal gift taxes.

What is Considered a Gift under Gift Tax Law?

According to the IRS, a gift is a transfer of money, property, or other assets, such as real estate or stock, for which the giver does not receive “full consideration,” which the IRS defines as fair market value. For example, the fair market value of property such as real estate is the price that a buyer and seller, both having reasonable knowledge about the property and under no pressure to trade, would agree to on the open market.

Any exchange can be considered a gift and subject to gift tax, with the following limited exceptions:

  • Tuition or medical expenses paid on behalf of another person
  • Gifts to a political organization
  • Gifts to your spouse (assuming both spouses are US citizens)
  • Gifts to qualified charities
  • Gifts that do not exceed the annual exclusion amount ($16,000 in 2022) to any one recipient in any given year

Generosity is its own reward. But you owe it to yourself to make sure that your gifts are properly accounted for, the right gift tax forms are filed, and that gifting fits into your estate planning goals. An estate planning attorney can help you understand the tax implications of gifting, as well as some of the hidden costs of a gift, such as real estate taxes, transfer fees, or capital gains tax.