It is common for older relatives to give financial gifts to younger ones when possible. But how much can you receive as a gift without having to pay a gift tax?
As of 2022, you can receive $16,000 per year without paying gift tax. The lifetime exclusion is $12.06 million for 2022, so most people are unlikely to have to pay gift tax on gifts they receive. Even if a gift tax is required, the giver typically pays it, not the recipient.
If you have generous friends or family or are generous yourself, then you will want to know some of the finer details of the gift tax. Learn more about the tax's limits and exclusions, taxation rates, and specific situations.
What To Know About The Gift Tax
The gift tax is a tax on money that someone gives to another person as a gift, meaning they got less than the money's full value (or even nothing) in return. A classic example is a parent or grandparent giving their kids or grandkids a present to help them buy a home or pay for their wedding. The idea is that the gift tax stops wealthy people from giving all of their assets to friends and family.
In most cases, the gift giver will pay the gift tax, not the recipient. If, for some reason, the giver doesn't pay the tax, the recipient may have to. However, this is not common. Most people giving a gift large enough not to be fully excluded can afford to pay the taxes as well.
But even the gift-giver is unlikely to have to pay taxes in most situations. That is because of a combination of annual and lifetime exclusions for gift taxes.
How To Avoid Paying Gift Tax
The exclusions are the simplest way to avoid paying gift tax, but there are a few other methods as well.
Take Advantage of Annual Exclusions
For most people, the annual exclusions will be enough to avoid paying gift tax. The annual exclusion was $15,000 in 2021, but it has been increased to $16,000 in 2022. This means that if the gift is less than $16,000, there is no gift tax to be paid. You won't even have to report the gift on your annual taxes.
More importantly, this gift tax exclusion is applicable per person. So, if a parent wants to give money to their child and spouse, they could give each of them $16,000, totaling $32,000. Or both mom and dad could each give each child and their spouse $16,000 each. This would let you essentially give $64,000 ($16,000 times 4) without having to report it.
Take Advantage of Lifetime Exclusions
Even if you give or receive more than $16,000, this does not necessarily require anyone to pay a gift tax. That is because there is also a lifetime exclusion. In 2021, it was $11.7 million, and it is $12.06 million for 2022. Even better, this lifetime exclusion only applies to the amount over the annual exclusion.
So, say you receive $50,000 in 2022. The annual exclusion would be $16,000, and the remaining $34,000 would count toward your lifetime exclusion. Your remaining lifetime exclusion would only be down $34,000, not the full $16,000. Your gift tax return is there to track this lifetime exclusion.
If you receive more than the annual exclusion but haven't reached the lifetime exclusion yet, then you and the gift-giver will have to report the gift on your taxes. But no one will have to pay gift taxes. You will report the gift via IRS Form 709.
This Exclusion Will Be Lowering in 2026
There is one important thing to remember with the lifetime exclusion. Before 2018, it was about $5 million per person, but it increased that year. As of 2026, it will go back to about that level. So, those who are extremely generous and have money to give should take advantage of the higher lifetime exclusion while it applies.
Divide the Gift Strategically Between Years
When it comes to the annual exclusion, the best way to get around the gift tax is to just divide it up between years. For example, if parents wanted to give their child $20,000, they could give them $16,000 in December of one year and $4,000 in January of the next year. Of course, this won't affect the lifetime exclusion.
Pay For The Product Or Service Directly
Another good method of avoiding a gift tax is just to purchase the intended product or service directly. For example, if parents want to pay for their child's wedding, they could directly pay all of the vendors and the venue instead of writing their child a check. If grandparents want to pay for their grandkids' college, they could directly pay the school. Meanwhile, you could also directly pay someone's medical bills.
Take Advantage Of Special Rules To Spread Out One-Time Gifts
The IRS has a special rule that lets you give a one-time gift and spread it out over five years of gift tax returns. This can apply in certain situations, such as when grandparents make a single large deposit to a grandchild's 529 plan for college.
Spouses And Charities Are Excluded
Keep in mind that there is no gift tax or gift tax return on gifts between spouses. If you give a gift to a nonprofit, this is technically a charitable donation and won't require a gift tax return either.
How To Avoid Gift Tax On Property
Property tends to be worth far more than $16,000, so giving property would trigger a gift tax return. But there are some strategies to consider.
Divide Up the Shares
Let's say a parent wants to give their child a home. Remember that each parent could give each spouse and each one of their children up to $16,000 per year. If there are enough family members and the property cost is low enough, you may be able to give the property in full.
Give Ownership Gradually
Another option is to give ownership gradually. Take advantage of the ability of each parent to give each spouse $16,000 a year and give ownership in annual amounts of $64,000 or less. Each year, transfer more of the property ownership.
Use Promissory Notes
One of the best options is to use promissory notes. For example, let's assume that a parent is giving a house to their child. They would give the full property to their child with a grant deed. The parent signs as the grantor, and the child signs as the grantee. The grant deed includes a purchase price, and the child signs promissory notes. Each promissory note is for the maximum annual exclusion, and they sign as many promissory notes as necessary to pay for the entire property.
Then, each year, the parent forgives one of the promissory notes. Since each note is at or below the annual exclusion, there is no gift tax.
How To Avoid Gift Tax On Down Payment
One of the most common situations when large financial gifts are exchanged, is for home down payments. The IRS treats this type of gift the same as they would any other gift. So, if you receive less than $16,000 as a gift, you won't have to report it.
If you want to avoid the gift tax, you can do any of the things mentioned above. For a down payment, this may mean giving the maximum to each spouse of the couple buying the house. It may also mean planning ahead and giving part of the down payment to the future home buyer one year and the rest the next.
Remember that even if you go over the annual gift limit of $16,000 when gifting or receiving a down payment, there is still the lifetime exclusion. As long as the down payment gift is not more than $12.06 million (the lifetime exclusion amount, plus $16,000), there will be no gift tax.
Other Things To Know About Down Payment Gifts
While the process of avoiding the gift tax for down payments is pretty straightforward, the actual gifting of a down payment comes with some complications. Simply put, the homebuyers' lenders will want reassurance that this was a gift, not a loan. As such, the gift giver needs to provide an official gift letter, and both parties will have to show the financial transaction.
The fact that lenders want to confirm a down payment gift is not a loan also means that there are restrictions on who can give this type of gift. It has to be an immediate family member or soon-to-be family. This includes parents, siblings, grandparents, spouses, future in-laws, engaged couples, and domestic partners.
Annually, you can give or receive up to $16,000 per person without having to pay gift taxes or file a gift tax return. Any gift over the $16,000 will count to the lifetime exclusion of $12.06 million. Gifts over $16,000 don't require paying taxes but will require filing a gift tax return. When gift taxes are necessary, the giver usually pays them instead of the recipient.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.