How Does the IRS Know If You Gave a Gift? The IRS Gift TaxPersonal Taxes
The IRS doesn’t need to know about all the gifts you give to the people you care about, especially if you stay within the gift tax limit applicable to your filing status.
This limit doesn’t affect the number of individuals who can receive a tax-free gift from you each year. Reporting gifts to the IRS in 2023 isn’t necessary if their value is below the $17,000 threshold.
As a donor, you won’t have to pay gift tax unless you exceed the lifetime gift tax limit. The maximum amount you can give to a single person as a gift in a year is adjusted annually.
You must keep up with the latest regulations to know the maximum value of a gift you can give someone without contributing to your lifetime gift limit or paying taxes. We’ll tell you how the IRS knows if you gave a gift and help you uncover the gift tax.
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What is a Gift For Tax Purposes?
Any property you transfer to another person can be treated as a gift for tax purposes if you don’t receive compensation in return for the property’s value.
Cars, valuable art, real estate, or cash can be gifted to a donee. Donations to political organizations, paying for someone else’s education expenses, or giving a gift to a spouse are excluded from the gift tax exemptions.
Moreover, the donor of the gift must meet the following criteria:
- Make the transfer of the property voluntarily.
- The donor must be competent to give a gift.
- The gift recipient must receive all the rights to the gifted property.
In most cases, individual taxpayers transfer the gift directly to the donee. This type of gift is referred to as a direct gift. This isn’t the only gift type available, and you can also make an incomplete, revisionary interest or indirect gift to a donee.
Donors that don’t want to pay taxes for a present can utilize the net gift option to transfer gift tax responsibility to the recipient.
Annual And Lifetime Gift Limits
You don’t have to report a gift you gave to someone to the IRS if its value is $17,000 or less. This amount was increased by $1,000 in 2023 from the year before.
The law doesn’t prevent you from giving gifts whose value is up to $17,000 to multiple donees. Moreover, married couples don’t have to report gifts with a value of up to $34,000, as they can combine their gift tax exemptions.
You’ll only have to file Form 709 if the value of the gift you give to an individual exceeds this year’s threshold gift amount.
However, this rule doesn’t apply to all types of gifts, and you must check the current regulations to determine if you must file the federal gift tax return.
Donees don’t have to report or pay taxes for the gifts they receive, although, under specific circumstances, they can be responsible for paying this tax.
The lifetime gift limit in 2023 is $12,92 million, but this amount will likely be reduced to $6 million by 2026. The first $17,000 of the gift’s value doesn’t contribute to your lifetime gift tax exemption limit, and only the excess amount is added to your gift tax balance.
This excess amount isn’t taxable unless it pushes you over the lifetime gift limit. Even so, you’ll have to file Form 709 whenever you make a gift more valuable than the current annual gift limit.
How And When to Report Gifts on Your Taxes?
The gift evaluation process is straightforward if you transfer cash to a donee.
However, determining the value of bonds, real estate, or vehicles is more complex because you have to ascertain their fair market value and, in some cases, get the property appraised by an authorized expert.
Gift tax exemptions don’t apply to all types of gifts. For instance, annual gift tax exclusion doesn’t apply to future interests, and you’ll have to file Form 709 even if the gift’s value is less than $17,000.
Married couples are subject to special gift rules, so you must check whether it’s necessary to file Form 709 if the total gift amount your spouse and you gave within a year is over the annual exclusion amount.
Remember that Form 709 is filed separately from Form 1040. You must file this form a year after giving a gift, between January 1 and April 15.
You don’t have to pay gift taxes if your aggregate lifetime gift value is under $12.92 million. Once you exceed this limit, the IRS will charge an 18% to 40% tax rate for each subsequent gift.
The Consequences of Failing to Report Gifts to The IRS
Gift donors must file Form 709 whenever the value of gifts they give in a year surpasses the annual exclusion. Failing to file this document could have immediate consequences because the IRS may audit your account and assess a penalty.
You’ll be charged a monthly fee of 5% of the due amount, which can increase to 25%. You’ll pay an additional $205 or 100 percent of the due amount if you don’t file Form 709 two months after the filing deadline.
Avoiding these penalties is impossible because the IRS can use public records to track all gifts you gave during your lifetime and charge them to your estate even after your death.
The purpose of reporting gifts more valuable than the annual exclusion is to allow the IRS to calculate the value of the presents you gave during your lifetime. Once again, you won’t have to pay gift tax until you reach the lifetime gift tax exemption.
Gift Distribution Tactics
All individual taxpayers must report gifts over $17,000. However, married couples can utilize the gift-splitting strategy to double the amount they can give to their children, grandchildren, or friends.
A couple must meet the criteria below to utilize this gift distribution tactic:
- Both spouses must be US citizens or residents in the year when they make a gift.
- A couple has to be legally married.
- Each spouse must submit their consent to split a gift to the IRS.
- The donor has to file Form 709, co-signed by the non-donor spouse.
Establishing a Crummey trust is also a common gift distribution strategy that allows the donee to withdraw the funds donated to the trust within a set timeframe. The strategy enables the donor to avoid gift taxes because the IRS treats the donated amount as a non-taxable gift.
Frequently Asked Questions
Taxpayers who receive a gift in a tax year don’t have to report it to the IRS. The donor must report the present if its value is higher than $17,000.
The responsibility for paying the gift tax is transferred to the donee if the donor doesn’t pay taxes before they die.
These terms cannot be used interchangeably in the context of federal taxes. Donations are contributions to charitable or non-profit organizations, while gifts are presents individuals give to close friends or family members.
You’ll have to pay taxes for all income you generate from a gift you receive. So, if you collect rent from the real estate your parents gave you as a present, you’ll have to report this income when you file taxes.
The Importance of Following Gift Tax Rules in 2023
You don’t have to worry about filing a federal gift return if you give Christmas gifts to your family members. You’ll only have to report gifts to the IRS if their value is over the annual exclusion amount.
So, if you give your child a car or an apartment as a gift, you’ll probably have to file Form 709 because the gift’s value will likely exceed $17,000. This doesn’t mean you’ll have to pay the gift tax since the excess amount will be added to your lifetime gift tax exemption.
It’s only important to report a gift to the IRS. Otherwise, they might audit your account and charge penalties. Paying gift tax is mandatory if the value of gifts you’ve given during your lifetime is higher than $12.92 million.
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.