Definition:
The annual exclusion gift is a gift that qualifies for the annual exclusion from federal gift taxes.
How Does the Annual Exclusion Gift Work?
The annual exclusion gift is a gift that can be included in the donor’s annual exclusion. The annual exclusion is a tax benefit that taxpayers can use when they give a gift that exceeds the exclusion amount.
Annual exclusion gifts are typically cash, stocks, bonds, parts of properties, or debt forgiveness on a family loan not exceeding the annual gift tax exclusion. The federal government sets the allowable limits for tax-exempt gifts each year.
Note: For 2022, the federal gift tax exclusion is $16,000, and the limit for 2023 is $17,000.
When you give a gift to someone worth less than the exclusion limit, you do not have to pay taxes on it. However, if your gift exceeds the limit, you will need to report the amount over the limit on IRS Form 709.
Each individual is granted a separate annual exclusion amount for gifts under U.S. tax law. They can give this amount to an unlimited number of people (family members and non-family members alike) throughout the year. For example, you can give any number of people a $16,000 gift in 2022 without incurring any tax penalties.
Married couples can combine their annual exclusion amounts, but the split gifts between spouse and spouse must be reported to the federal tax office on IRS Form 709.
Note: Gifts made to a U.S. citizen spouse are exempt from gift taxes due to the unlimited marital exclusion. Gifts made to a non-citizen spouse have an annual exclusion amount of $159,000 for 2022 and $164,000 for 2023.
Example of Annual Exclusion Gifts
Suppose that during the year 2022, you and your spouse, who are both U.S. citizens, made the following gifts:
- You give $5,000 to your son Khalid in March and then another $5,000 in December.
- Your spouse gives $10,000 to her daughter Regina in March and then another $10,000 in December.
- You give $2,000 to your niece Gizelle in June.
- You give your spouse a diamond ring worth $50,000 in December.
Gifts that do not require reporting:
You made total gifts worth $62,000 in 2022. Fortunately, all gifts meet the annual exclusion requirements or are not subject to tax under the unlimited marital exclusion. The $10,000 gift to Khalid and the $2,000 gift to Gizelle qualify for the annual exclusion, and the total $50,000 to your spouse meets the unlimited marital exclusion.
Gifts that require reporting:
On the other hand, your spouse made total gifts worth $70,000 in 2022, which may or may not meet the annual exclusion requirements: the $20,000 total to Regina exceeds the annual exclusion limit of $16,000, while the $50,000 total to you meets the unlimited marital exclusion.
What about the $20,000 to Regina? Will $4,000 of the $20,000 given to her be considered a taxable gift or not? It will depend on two factors:
- How the account(s) from which the money was obtained are named.
- Whether you agree to split the gifts with your spouse or not.
You and your spouse can agree to split the $20,000 gift to avoid taxes. To do this, both of you will need to report the split gift to the federal tax office using IRS Form 709. If you do not agree to split the exclusion on Regina’s gift with your spouse, your spouse will need to report a taxable gift of $4,000 to the federal tax office using IRS Form 709.
Questions
Frequently Asked Questions (FAQs)
How does the annual gift exclusion work?
The Internal Revenue Service allows you to give gifts up to a certain amount per person each year without incurring taxes on the gift’s value above that amount. However, if you exceed this amount, you will owe taxes on the excess value of the gift.
Does the annual gift exclusion apply to charitable gifts?
Generally, charitable donations do not count toward the annual gift exclusion. However, if the Internal Revenue Service requires you to report your non-charitable gifts, you must also report your charitable gifts.
Source: https://www.thebalancemoney.com/what-is-an-annual-exclusion-gift-3505671
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