How Much Can I “Gift” Without Reporting to the IRS?
Author: Attorney Catherine C. Orton
Whether it is the Christmas season or any other time of the year, it is important to remember that there are certain gifts that can be made without any requirement that the gifts be reported to the IRS, and without paying any federal Gift Tax. For many years, the maximum limit on these gifts, known as the “annual exclusion amount,” was $10,000 per person per year, and the amount stayed at $10,000 for many years. Of course, gifting between spouses is unlimited under the tax laws, and taxpayers could certainly make gifts for less than $10,000 without reporting the gift.
In 1997, Congress pegged this “annual exclusion” amount to inflation and it has been rising slowly ever since. This year, the maximum amount you can “gift” without any reporting to the IRS is $16,000.00 per person, per calendar year. Next year, in 2023, the “annual exclusion” is $17,000.00 per person, per year.
These “annual exclusion” gifts can be made to anyone, and you can make as many gifts to different people, per year, as you wish. For example, in 2022, you and your spouse can each make such a gift to each of your children, for a total of $32,000 to each child, and the same amount can be gifted by you and your spouse to each grandchild and to anyone else, so long as the gift to each person does not exceed the maximum annual exclusion amount in one calendar year.
Thus, depending upon the number of children and grandchildren, a couple could transfer substantial wealth in one tax year to their loved ones without any IRS reporting requirement and no Gift Tax, and then, they could do it again the following calendar year. In this way, individuals who would potentially be subject to an Estate Tax at their deaths, can, by gifting, reduce their overall assets to stay under the threshold amount for Estate Taxes.
In addition to the Gift Tax annual exclusion rule which eliminates the need to report gifts made under the annual exclusion amount, the Internal Revenue Code allows all but the largest estates to pass without an Estate Tax filing (and, thus, no Estate Tax) following death. Currently, the Estate Tax is imposed on total transfers, during life and at death (not including annual exclusion gifts), which exceed $12.06 million for 2022 and $12.92 million for 2023. In other words, there is no Estate Tax and no filing requirement if your lifetime gifts and death transfers do not exceed the $12 million exemption amount. But, for those taxpayers whose assets exceed that exemption amount, the Estate Tax Rate between 18% and 40% for amounts over the exemption, is a heavy burden indeed for your loved ones.
But a dramatic change is coming: the current lifetime exemption amount of over $12 million will expire at the end of 2025. On January 1, 2026, the $12 million exemption amount drops dramatically to between $5 million and $6 million (depending on inflation), and thus, as of 2026, many more taxpayers will be subject to the Estate Tax.
There are many complex rules related to these Gift and Estate Tax planning. For example, gifts which are not subject to the Gift Tax include: (1) gifts to your spouse; (2) tuition or medical expenses paid on someone else’s behalf; and, (3) gifts to charitable organizations. These gifts, and annual exclusion gifts, are not subject to the federal Estate or Gift Tax and, therefore, can be very useful in Estate and Tax planning.
This is a complex area fraught with pitfalls for the non-professional, but there are also some opportunities for excellent planning if you work with a good, experienced Estate Planning attorney. Please contact your Estate Planning attorney and/or tax preparer to discuss these matters further.