Updated for tax years 2021 and 2022.
Surprise — Mom and Dad gave you a nice check! Maybe it’s enough for dinner, or maybe it’s something more substantial.
Either way … are there any tax implications for receiving such a gift?
How much is the annual gift tax for 2021?
First, let us put your mind at ease. The total gift amount must be quite substantial before the IRS even takes notice.
For tax year 2021, if the value of the gift is $15,000 or less in a calendar year, it doesn’t even count (increasing to $16,000 in 2022). The IRS calls this amount the annual gift tax exclusion.
And if a married couple makes a gift from joint property, they can each gift up to the annual exclusion. This means Mom and Dad could give you $30,000 without worrying about paying any gift tax.
This tax exists to prevent people from giving away their money to avoid paying their income taxes. The gift tax rate fluctuates from 18 to 40 percent, depending on the size of the gift.
For instance, if you give someone a gift worth between $20,000 and $40,000, the marginal gift tax rate is 22 percent. But if you give someone a gift valued between $750,000 and $1,000,000, the marginal gift tax rate would be 39 percent.
Does the gift recipient ever have to pay gift tax?
As the recipient of the gift, you are generally in the clear. The person who does the gifting will be the one who files the gift tax return, if necessary, and pay any tax due.
If the donor does not pay the tax, the IRS may collect it from you. However, most donors who can afford to make gifts large enough to be subject to gift taxes can also afford to pay the tax on the gifts.
Gifts not subject to the gift tax
Some transfers of money are never considered taxable gifts. These kinds of transfers are tax-free, no matter the amount.
For purposes of the gift tax, it’s not a gift if:
- It’s given to a husband or wife who is a U.S. citizen. Special rules apply to spouses who are not U.S. citizens.
- It’s paid directly to an educational or medical institution for someone’s medical expenses or tuition expenses.
Gift tax is not an issue for most people.
If someone gives you more than the annual gift tax exclusion amount ($15,000 in 2021), the giver must file Form 709 (a gift tax return). However, that still doesn’t mean they owe gift tax.
For example, say someone gives you $20,000 in one year. The giver must file a gift tax return showing an excess gift of $5,000 ($20,000 – $15,000 exclusion = $5,000).
Each year, the IRS keeps track of any gifts that exceed the annual gift exclusion amount. Your excess gift amount accumulates until it reaches the lifetime gift tax exclusion amount. As of tax year 2021, the lifetime exclusion is $11.7 million (increasing to $12.06 million for 2022).
This lifetime exemption allows the gift giver to give more than the annual exclusion. They will need to file a gift tax return for any gifts exceeding the $15,000 annual exclusion, but they will not need to pay gift tax until they have given away over $11.7 million in their lifetime.
What about estate taxes and inheritance taxes?
Many people also have questions about estate and inheritance taxes when discussing the gift tax. While often grouped together, these are actually two different types of tax:
- Inheritance tax: This is the tax a beneficiary must pay when inheriting assets from someone who died. There is no federal inheritance tax, but as of tax year 2021, six states impose their own inheritance tax — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The tax rates vary depending on the inheritance’s size and the beneficiary’s relationship to the person who died. Spouses (and sometimes children or other descendants) are generally exempt from the inheritance tax.
- Estate tax: This is the tax taken out of an estate (cash, real estate, stocks, etc.) upon someone’s death. The federal estate tax only comes into play when the total estate value exceeds $11.7 million ($12.06 million in tax year 2022). Any portion of the assets exceeding this amount is a taxable estate. Some states have their own estate tax as well, and the exclusion amount varies depending on the state.
Gift tax calculator
Estimate your gift taxes owed for 2021 with TaxAct’s gift tax calculator.
Step 1: Select your tax year.
Step 2: Select your filing status.
Step 3: Enter any gifts given before the tax year selected.
Step 4: Enter any gifts given during the tax year selected.