Who doesn’t dream of waking up to an extra $20,000 in their bank account from a wealthy long-lost relative or an affluent new friend? I would be lying if I said I didn’t!
But frivolously giving away cash isn’t all that it’s cracked up to be, and that’s because of the gift tax.
Am I saying that the IRS will tax cash gifts? Sometimes, yes. But it includes so much more. So let’s dive into everything you need to know about the gift tax limit in 2022.
What Is a Gift?
Before discussing the gift tax, let’s identify what the IRS considers a gift. A gift is an asset, whether cash, property, or a car, that you give to someone directly or indirectly without getting something of equal value in return.
For example, if you loan a friend $4,000 and don’t charge interest on repayment, the IRS says that’s a gift.
If you want to buy your kid a car for their 21st birthday, it’s a gift.
Want to help your son and future daughter-in-law pay for their wedding or put down a payment on their first home? Also, a gift.
And, if they later sell their home for a profit, they may also be subject to capital gains tax.
Technically, when you don’t receive fair market value for an asset you’ve given away, the IRS classifies it as a gift. So from paying off someone’s credit card bill to taking your boyfriend or girlfriend on the shopping spree of a lifetime, the IRS considers it a gift.
Even elbowing in on a non-spouse bank account can be a gift. For instance, you are the joint owner of a bank account with your grandpa. You two are neighbors, so it makes sense for you to help manage his finances.
As a joint owner, you can legally withdraw money from the account. When you do so, grandpa is giving you a gift. But, as you’ll see, this example is not as simple as it looks, and exclusions may occur.
If you are also your grandpa’s caretaker and you’re going to collect his medications from the pharmacy, he is receiving fair market value for the money you took from the account, and the gift tax won’t apply.
2022 Gift Tax Limit
This year, the IRS raised the annual gift tax exclusion from $15,000 to $16,000. The increase is due to inflation as the IRS hasn’t raised it since 2018.
This means you can give away $16,000 to a single individual over the calendar year, and you won’t be subject to the gift tax.
Anything you give to a dependent does not count toward the gift tax.
After $16,000, you’ll be over the tax-free gift limit for 2022, and you may be subject to taxes. The person giving the gift is usually the one who reports the gift and pays the taxes. The person receiving the gift seldom needs to worry about paying taxes.
Of course, there are exceptions to this rule that we will delve into.
Exclusions to the Gift Tax 2022 Limit
While are several exclusions to the gift tax, there are also legal ways to avoid paying the gift tax if you give an individual more than $16,000 in the 2022 calendar year ($15,000 for 2021).
Take a look.
Health and Education Expenses
We all know that health and education are two of the most costly expenses in America. Thankfully, you can pay for someone’s school tuition or medical expenses without triggering the gift tax.
However, you must pay the money directly to the educational or medical institution, not the individual.
If you want to pay for your grandma’s cancer treatments, make sure you send the money to her treatment center or hospital and don’t deposit the money in her account.
Although paying someone’s tuition won’t trigger the gift tax, this doesn’t include books, dorm fees, or meal plans. Those costs may trigger the gift tax if the person you are “gifting” them to is not a dependent.
Those who want to avoid the gift tax and help pay for a college education can make a lump-sum contribution to a 529 college savings plan. You can spread the contribution over five years to lower your tax responsibilities.
The limit for a 529 plan contribution without lowering the lifetime gift tax limit is $75,000. You’ll learn more about the lifetime limit below.
Couples receive a few exceptions from the IRS regarding the gift tax. The exceptions apply to giving away money and gifting each other money.
First, since spouses can each give $16,000 gifts, together, they can give $32,000 to an individual in one calendar year. The IRS calls this “gift splitting.”
Moreover, if your spouse is a U.S. citizen, you can gift them any amount throughout the year. There is no limit for gifts between spouses if they are both U.S. citizens. However, if your spouse isn’t a U.S. citizen, the 2022 limit is $164,000.
It is not a gift if you donate money to a nonprofit or make a charitable donation. Always ensure the organization you want to contribute to has the proper registration, usually 501(c)(3), so your contribution doesn’t trigger the gift tax.
You can also donate money to a political campaign without initiating the gift tax. Although you won’t be subject to a gift tax, political campaign finance laws have limitations on how much you can donate and to whom. Learning about these laws and the various ways to make a political contribution before donating is best.
What Happens If You Give More Than $16,000?
If you give more than $16,000 to someone outside the exemptions, you’ll need to file a federal gift tax return (Form 709). Filing Form 709 doesn’t mean you must pay the gift tax. It simply means you need to disclose the gift to the IRS.
Giving more than $16,000 in one year likely won’t trigger the gift tax because you can include the gift in the lifetime gift tax exclusion.
Lifetime Gift Tax Limit in 2022
As the name suggests, the lifetime gift limit is how much you can give to an individual throughout your life. The lifetime IRS gift tax limit for 2022 also increased. It went from $11.7 million to $12.06 million.
Let’s see this in context.
This year you want to help your daughter buy a car. You find a used car for $20,000 and buy it outright for her. You’ll use up your $16,000 annual exclusion.
Now you have two options.
The first is to have your spouse also go in on the gift. Remember, you can give $32,000 to an individual together via gift splitting. This way, you would have $12,000 you can still give your daughter for the rest of the year.
The second is to apply the extra $4,000 toward the lifetime exclusion. If you choose this option, you’ll need to file Form 709. It will provide a gift record and deduct the $4,000 from the lifetime exclusion.
Either way, you won’t pay any taxes this year.
Additionally, since your spouse can also give $12.06 million over someone’s lifetime, your daughter can receive $24.12 million from the two of you via gift splitting. That $4,000 doesn’t make a dent in the lifetime limit.
However, following the Tax Cuts and Jobs Act of 2017, the lifetime exception is set to drop to $6.2 million at the end of 2025. So if you have gifted several million dollars to a family member or friend, you’ll want to speak with a tax advisor to see how this will affect you.
The IRS specified that those making larger gifts before 2025 will not lose the tax benefit of the higher exclusion level when it decreases, but it’s always best to consult an expert.
The lifetime gift tax exclusion works in tandem with the estate tax. This means the more money you give above the annual gift exclusion, the less money you can leave to your heirs tax-free when you die.
The executor of your estate will determine its value and add it to the total taxable gifts you made in your lifetime. If the amount is greater than the exception, your estate will need to pay estate tax.
Some states also impose their own estate tax with different lifetime exemption amounts. Other states have inheritance taxes.
Yet, $12.06 million for singles and $24.12 million for couples is a huge threshold that most people will never reach. Even the reduced rate of $6.2 million coming in 2026 is unattainable for many.
But if you think your estate will go above the lifetime cap, you can choose to pay the gift tax when you give more than $16,000 in a year. This will protect your estate later on. Always work with a tax professional to determine which strategy will equal lower taxes.
Gift Tax Rate
The current gift tax rate is between 18% and 40%. The gift tax is a progressive system, meaning the more money you give someone, the higher the tax rate you’ll pay.
And while this is where the rates stand, tax laws are constantly changing. So you never know when Congress will rewrite them.
Gift Taxes Explained
With a complete understanding of the gift tax limit in 2022, you’re set to gift away as much (or as little) money as you want to your family and friends. Just don’t forget to fill out Form 709 if you exceed the $16,000 annual limit.
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