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Gift Tax: An Overview of IRS Gift Tax Rules

Do you want to gift money or assets to loved ones while staying tax compliant? As a business owner, understanding federal gift tax implications lets you give generously without financial pitfalls. 

Generosity is an admirable trait.  Coupled with the right information and strategy, you can continue without creating more of a tax burden on you and your business.  Here is what you need to know.

Defining Taxable Gifts

The IRS defines a gift as any asset transfer for below fair value compensation. Common examples include:

  • Giving money or property to family members
  • Paying tuition or medical bills for someone else
  • Making a large donation to charity
  • Forgiving a loan
  • Jointly owning a house and paying more than your share of the purchase price

Bottom line, if you provide assets without receiving equivalent value in return, it classifies as a gift.

Who Bears Responsibility for Tax

As the gift donor, you pay applicable federal gift taxes. However, gift recipients can file a tax return electing to cover tax instead.

Current Gift Tax Rates

Gift tax rates range from 18-40% based on the gift’s fair market value. The IRS website details current brackets. For additional information on the tax rate limits, visit the IRS website

The Annual Gift Exclusion  

In 2023, you can provide up to $17,000 in gifts per individual annually tax and filing-free. You could give $17k each to multiple recipients without exceeding the annual exclusion.

Exceptions to the $17K Annual Threshold

While most gifts fall under the annual exclusion cap before requiring tax filings or payments, some common exceptions exist. These include:

  • Gifts to your legally married U.S. citizen spouse
  • Qualified charitable contributions claimed on your income taxes  
  • Political, educational, medical or tuition payments made directly to institutions

When Gift Tax Filings Become Necessary  

You must file Form 709 for:

  • Gifts exceeding $17k provided to any individual in 2023
  • Deducting charitable giving on tax returns

Failing to file mandatory gift tax returns leads to owing interest and penalties. Consult a tax professional to ensure compliance.

Ways to Minimize Gift Tax Liability

All is not lost.  Even if you plan to give a large gift, there are ways to reduce potential gift taxes. Some of them include:

  • Spacing large cash gifts over multiple years 
  • Donating appreciated investments to charities rather than individuals
  • Setting up an appropriate trust vehicle

Get Personalized Guidance

While this covers high-level federal gift tax rules, individual situations and state laws vary. Meet with an Iota Financial CPA to discuss your unique gifting circumstances and tax planning opportunities. Our goal is helping you give freely while minimizing owed taxes. Reach out to start the conversation!

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