What is the gift tax?

The gift tax is a tax on the transfer of money or property to another person while getting nothing (or less than full value) in return.

Many people don鈥檛 get hit with the gift tax, because the IRS generally doesn鈥檛 care about what you give away to other people unless that giving exceeds some lofty amounts. And even if it does, it might mean you just have to fill out some paperwork.

How much can you gift?

Two things keep the IRS鈥 hands out of most people鈥檚 candy dish: the $15,000 annual exclusion in 2018 and 2019, and the $11.2 million lifetime exclusion (in 2018). In 2019, the lifetime exclusion rises to $11.4 million. Stay below those and you can be generous under the radar. Go above, and you鈥檒l have to fill out a gift tax form when filing returns 鈥 but you still might avoid having to pay any gift tax.

How the annual gift tax exclusion works

In 2018 and 2019, you can give up to $15,000 to someone in a year and generally not have to deal with the IRS about it.
If you give more than $15,000 in cash or assets (for example, stocks, land, a new car) in a year to any one person, you need to file a gift tax return. That doesn鈥檛 mean you have to pay a gift tax. It just means you need to file IRS Form 709to disclose the gift.
The annual exclusion is per recipient; it isn鈥檛 the sum total of all your gifts. That means, for example, that you can give $15,000 to your cousin, another $15,000 to a friend, another $15,000 to the neighbor, and so on all in the same year without having to file a gift tax return.

The annual exclusion also is per person, which means that if you鈥檙e married, you and your spouse could give away a combined $30,000 a year to whomever without having to file a gift tax return.
Gifts between spouses are unlimited and generally don鈥檛 trigger a gift tax return. Gifts to nonprofits are charitable donations, not gifts.
The person receiving the gift usually doesn鈥檛 need to report the gift.

How the lifetime gift tax exclusion works

On top of the $15,000 annual exclusion, you get an $11.2 million lifetime exclusion (in 2019, that rises to $11.4 million). And because it鈥檚 per person, married couples can exclude double that in lifetime gifts. That comes in handy when you鈥檙e giving away more than $15,000.
鈥淭hink about buckets or cups,鈥 says Christopher Picciurro, a certified public accountant and co-founder of accounting and advisory firm Integrated Financial Group in Michigan. Any excess 鈥渟pills over鈥 into the lifetime exclusion bucket.

For example, if you give your brother $50,000 this year, you鈥檒l use up your $15,000 annual exclusion. The bad news is that you鈥檒l need to file a gift tax return, but the good news is that you probably won鈥檛 pay a gift tax. Why? Because the extra $35,000 ($50,000 鈥 $15,000) simply counts against your $11.2 million lifetime exclusion. Next year, if you give your brother another $50,000, the same thing happens: you use up your $15,000 annual exclusion and whittle away another $35,000 of your lifetime exclusion.

鈥淲hat the gift tax return does is it keeps track of that lifetime exemption,鈥 says Julie Malekhedayat, a CPA and principal at accounting and advisory firm Abbott, Stringham and Lynch in San Jose, California. 鈥淪o if you don鈥檛 gift anything during your life, then you have your whole lifetime exemption to use against your estate when you die.鈥

The IRS generally doesn鈥檛 care about what you give away to other people unless that giving exceeds some lofty amounts. And even if it does, it might mean you just have to fill out some paperwork.

What is the gift tax rate?

If you鈥檙e lucky enough and generous enough to use up your exclusions, you may indeed have to pay the gift tax. The rates range from 18% to 40%, and the giver generally pays the tax. There are, of course, exceptions and special rules for calculating the tax, so see the instructions to IRS Form 709for all the details.

What can trigger a gift tax return?

Caring is sharing, but some situations often inadvertently trigger the need to file a gift tax return, pros say.

Spoiling the grandkids with college money

Picciurro explains it like this. 鈥淟et鈥檚 say Grandma and Grandpa say, 鈥榃e don鈥檛 really like your husband and we don鈥檛 really like you, but we really like our grandkids. So we鈥檙e going to give $60,000 and we鈥檙e going to put it ina 529 plan for them so their college is paid for.鈥 Well, Grandma and Grandpa just triggered the gift tax exclusion because it鈥檚 over [$15,000].鈥

A special rule allows gift-givers to spread one-time gifts across five years鈥 worth of gift tax returns to preserve their lifetime gift exclusion.

Springing for vacations, cars or other stuff

If you fork out $40,000 for Junior鈥檚 wedding, or just pay for the crazy-expensive honeymoon, get ready to do some paperwork. 鈥淭hose kinds of things are actually gifts that people normally wouldn鈥檛 even think about,鈥 Malekhedayat warns.
If you鈥檙e paying tuition or medical bills, paying the school or hospital directly can help avoid the gift tax return requirement (seethe instructions to IRS Form 709for details).

Laid-back loans

Lending money to friends and family is usually a bad idea, and the IRS can make it even worse. It considers interest-free loans as gifts, Malekhedayat says. 鈥淥r if you give them a loan and later decide they don鈥檛 need to repay the loan to you, that鈥檚 also making gifts,鈥 she warns.

Elbowing in on a non-spouse bank account

鈥淟et鈥檚 say you live by Grandma, so for convenience, we鈥檙e going to put you on Grandma鈥檚 bank account. Guess what just happened?鈥 Picciurro says. 鈥淚f you鈥檙e put as a joint [owner] on a bank account with somebody and you have the right to take the money out at any time, essentially Grandma is giving you a gift.鈥