While exchanging presents at the holidays or gift cards on birthdays is always special, sometimes people have the ability to give more, in the form of a monetary gift. Not a $20 tucked in a birthday card (although those are nice, too) but the bigger sums the IRS categorizes as a “financial gift.” These gifts can be incredible, even life-changing. Perhaps a friend or family member has a windfall that they want to share, or maybe a grandparent wants to help a grandchild purchase a first home. If you’re in a position to either give or receive a financial gift, lucky you! But you’ll need to make certain you know the rules before you write a check or have money transferred. Here’s a breakdown.
What Is A Financial Gift?
According to the IRS, a gift is “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.” Come again? It’s a monetary gift that is given freely — it isn’t payment for something else, and it’s money that never has to be paid back.
But there are limits on how much you can give without involving Uncle Sam. As much as we might wish you and your BFF could slip each other millions (like George Clooney did that one time) without ever having to say a thing, there are taxes to consider.
How Much Money Can You Give Or Receive Without Having To Worry About Taxes?
For starters, anyone who receives a cash gift doesn’t have to worry about taxes — taxes are paid by the giver. In 2023, any single person can give another single person up to $17,000 during the year without tax implications. This figure is known as the gift tax “exclusion” amount, and it often changes every year based on inflation, changes to the tax code or various other factors.
But keep in mind that $17,000 is the maximum a single person can give without tax implications — married couples can combine their resources to give much more. “If you are married,” explains Tyler E. Smith, founder and certified financial planner at BBK Wealth, “you can give up to $34,000 to an individual.” This is because one half of the couple can give $17,000 to a person, and the other half of the couple can give $17,000 to the person. For example, in a situation where a mom and dad wanted to give a generous financial gift to their daughter, son-in-law, and granddaughter, the maximum amount that could be given to that family without tax implications would go up to $102,000. That’s because the mom could give $17,000 three times: once to her daughter, once to her son-in-law and once to granddaughter ($51,000) and the dad could also give $17,000 three times to his daughter, son-in-law and granddaughter ($51,000) for a total of $102,000.
What if you want or need to give a gift that’s over the annual tax exclusion. Unless we’re talking millions and millions, there aren’t going to be taxes owed, but you do have to file an additional form with your taxes (it’s IRS form 709). On this form, you’ll disclose exactly how much you gave, per recipient — and file it when you file your taxes. In addition to being able to gift the $17,000 (or whatever the limit rises to) annually, each individual person has what’s called a “lifetime gift exemption.” This is the amount the government allows you to give away during your life — or as part of your estate at death — before estate taxes kick in. In 2023, this amount stands at almost $13 million. Like we said, millions and millions. Go over that amount and, yes, the giver will owe taxes ranging from 18% to 40%. Note: The current lifetime gift exemption is so high because it was basically doubled with the passage of the 2017 Tax Cuts and Jobs Act. Many of the provisions of that law are set to expire in the next few years, including this one. In 2026, if Congress doesn’t act to repeal it, it will fall to about $7 million per individual. Simultaneously, the highest tax rates on estates/gifts will rise to 45%.
Are There Any Exceptions To These Rules?
When we’re talking about traditional cash gifts, no. “The exception to this would be if the gift is an asset that produces income as opposed to just cash,” Smith says. In other words, when something like an apartment building or a stock portfolio is gifted, then the giver AND the recipient will need to file IRS Form 709. This still doesn’t mean taxes will be owed (again, that depends on the amount) and again — those taxes are usually paid by the giver. It’s only in rare cases that the gift receiver owes money — your tax preparer can tell you more, based on your unique situation.
There are some other monetary gifts that are never taxed — no matter the amount given — include gifts to your spouse (at death, one spouse can pass an estate of any size to another) or gifts to a political organization or a qualifying charity. Additionally, if you’d like to help someone out with tuition or medical bills, those gifts are also never taxed as long as you directly pay the institution or medical facility itself rather than just writing a check to the recipient.
Lastly, if you’re planning to give an asset like a car or a property, know that it’s also taxable as a gift, and the $17,000 exclusions still apply. Per the IRS, “The general rule is that any gift is a taxable gift,” and the gift will be valued at “fair market value.” This means you can’t gift your child a 40-acre property and value it as $1, or gift a friend a Ferrari and value it as if it’s a Honda Civic.
A Breakdown On The Rules Of Giving And Receiving
If You’re The Giver…
- The first — and most important — thing to do is make sure you have the resources to give the gift. The last thing you want to do is let your generous heart overextend your budget. Review your financial situation with a trusted financial advisor before you give.
- Also, importantly for parents and grandparents: If you start making annual gifts, be very clear with your offspring about whether this is a one-time thing or something that will continue. You don’t want to set expectations that come back later to damage your relationships.
- As the gift-giver, it’s your responsibility to report gifts for amounts above the annual limit on your taxes. This is true whether you’re giving cash, assets, or income-producing assets.
If You’re The Recipient…
- With a monetary gift, you don’t have to do anything but send a thank-you note. Make sure, however, that the gift is a true gift and not a loan — the last thing you want is to have stress or friction with friends and family over a lack of understanding around money.
- If you’re inheriting an income-producing asset, like a rental property, you’ll also need to file IRS Form 709 with your taxes.
- If you plan to use the money you’ve been given for tuition or medical expenses, make sure to keep your receipts. Your tax preparer can advise you if there may be tax deductions available.