Updated for tax year 2024.
If you give away generous sums of money to a loved one, whether a friend or family member, you may be required to pay a gift tax to the Internal Revenue Service (IRS). However, with a bit of financial planning, you can afford to be quite generous before you must break out IRS Form 709 to report the amount and be on the line to pay extra money.
Here are three easy ways to steer clear of paying gift tax as a taxpayer.
At a glance:
- To avoid the gift tax, give up to the annual exclusion amount ($18,000 in 2024) to any one person in a tax year.
- Being married doubles your giving power.
- Consider spreading large gifts over multiple years to stay within the limit.
What is the gift tax?
The gift tax may sound scary, but it only kicks in if you gift over a certain (very high) threshold in your lifetime. Each year, the IRS sets an annual gift tax exclusion amount, meaning you can give up to the annual gift tax exclusion to any one person in a single tax year. For 2024, the exemption amount is $18,000. So, each person can gift up to $18,000 to another person tax-free in 2024.
Basically, if you want to give $18,000 to 10 different people in a year, you won’t have to notify the IRS. However, if you give more than $18,000 to just one person, you’ll need to file a gift tax return. Filing a gift tax return does NOT automatically mean you owe taxes on the gift; just that the gift needs to be reported to the IRS.
The annual exclusion amount does rise periodically due to inflation, so it’s important to double-check the amount each tax year to ensure you don’t give over the limit. For example, the limit was $17,000 in tax year 2023.
How to avoid the gift tax
1. Double (or quadruple) your limit.
Being married is an easy way to double your giving power, as married couples are entitled to the annual exclusion amount on a gift. As long as the gift is given from joint property, the IRS considers the gift to be half from each spouse. Therefore, you and your spouse can give $36,000 total to one individual during the tax year.
The same rule applies when you give to a married person. You can give an additional gift of up to $18,000 in one year to the recipient’s spouse, bringing the annual limit from one couple to another couple to $72,000 ($18,000 x 4 = $72,000) in 2024.
2. Pay medical bills or tuition directly.
If you’d like to help a family member with college or medical expenses, paying the medical or educational institution directly may be best to avoid extra taxes.
When you give a $50,000 check directly to your grandson heading off to college, it’s treated differently by the IRS compared to if you were to write the check directly to the college for tuition. The check written to the college for educational expenses doesn’t count as a gift for gift tax purposes. However, if you write a check to your grandson, regardless of how he uses the money, it’s considered a monetary gift. The same is true for other bills like medical bills. If you pay the money directly to the medical institution, it’s not considered a gift. If you pay it to the person for the purpose of paying their medical bill, it’s still a gift for tax purposes.
3. Spread the gift out between years.
If you’re tempted to give a large gift for the holidays, consider gift splitting. It’s exactly what it sounds like — splitting the gift into two checks instead. For example, if you want to give your single adult son $20,000, first write him a check for no more than $18,000. Then, wait until the new year to give him the remaining amount.
Gift tax FAQs
What if I’ve already given more than the annual gift tax limit?
If you’ve already gifted a single person more than $18,000 in 2024, you’ll need to file a gift tax return. Don’t worry; filing a gift tax return is not difficult, and you may not even owe any tax yet, unless you’ve exceeded your lifetime gift tax exemption amount. Yep, there’s a lifetime gift tax exclusion, too.
Basically, the dollar amount exceeding the annual limit ($18,000) is added up throughout your lifetime. Anything that exceeds the yearly exclusion counts toward the lifetime gift exclusion. Only once you exhaust your lifetime exclusion will it be a taxable gift. For 2024, the lifetime limit is $13.61 million per person (up from $12.92 million in 2023). Married couples can gift double that ($27.22 million) to one person in their lifetime without tax consequences. For most of us, that means we’re in the clear.
The bottom line
The gift tax doesn’t have to be a big deal if you plan ahead. By sticking to the annual exclusion limit, doubling your giving power as a couple, paying bills directly to providers or institutions, and spreading out larger gifts, you can be generous without worrying about tax liability. The key is to stay on top of the current gift limits and use these strategies to keep things simple.
Want to run some numbers? Check out our handy gift tax calculator to determine if you’ll owe any gift tax this year.