Understanding US gift and estate tax is crucial for US citizens or residents who wish to manage their finances effectively and plan for the future – especially for individuals with higher net worth or those living overseas, who will almost certainly have to manage significantly more complex tax situations.
Having a strong understanding of gift and estate taxes will go a long way towards successful wealth planning and preservation, ensuring you’re in full compliance with US tax law, and maximizing the benefits received by family and inheritors. Proper planning will help to ensure a smooth transition of your wealth to future generations.
Gift Taxes
Key Takeaways for Gift Taxes
Gift taxes are applied to transfers of money and property to other people who give nothing, or less than the equivalent value of your gift, back in return.
Gift taxes are paid by the gift giver, not the recipient
Gift taxes must be filed if they exceed the annual exclusion limit ( $17,000 in 2023, $18,000 in 2024)
Gift taxes are only owed after exceeding the lifetime gift tax exclusion ($12,920,000 in 2023, $13,610,000 in 2024)
Gifts to family and friends are not tax deductible, but charitable donations are.
Gifts between spouses have no annual limit unless your spouse is a non-US citizen, in which case the limit is $175,000 (2023) or $185,000 (2024).
What constitutes a gift, and who is subject to the gift tax?
A gift can be real or personal property, whether tangible or intangible, that was given directly or indirectly, in trust, or by any other means. A sale or exchange where the value received was less than the value of what was sold or exchanged is also considered a gift.
Other transfers or situations that could constitute a taxable gift include:
Forgiving a debt,
making an interest-free or below-market-rate loan,
Transferring the benefits of an insurance policy
Some property settlements in divorce cases
Transfer of digital assets
Sharing of a joint bank account
Gifts or transactions which are NOT taxable:
Transfers to political organizations
Transfers to specified exempt organizations (i.e. charities)
Payments that qualify for educational exclusions
Payments that qualify for medical exclusions
For full details about these exclusions, refer to the IRS Instructions for Form 709.
The giver of the gift is the one who is responsible for paying the tax. The gift tax is still applicable in almost exactly the same way if:
if you are a non-resident US citizen (living abroad)
a non-citizen resident (Green Card holder),
if you are a non-resident alien, if the property is located in the US.
In this case, there is no lifetime exclusion exemption, and any value of the gift exceeding the annual exclusion limit will be taxed.
Essentially the only exceptions for the gift tax are:
Gifts from non-resident non-aliens where the property is NOT located in the US
Gifts to US-citizen spouses
Gifts to non-US-citizen spouses have an annual exclusion limit of $175,000 (2023), or $185,000 (2024).
Example 1: You are an American expat living in Taiwan, and you gift your spouse a real-estate property in the US worth $200,000 in 2024. This exceeds the non-US-citizen spouse annual exclusion of $185,000 so you will need to file a gift tax return, and the difference ($15,000) will be applied to your lifetime exclusion.
Example 2: You are a resident alien (Green Card holder), residing in the US. You have an US citizen spouse and one US citizen child. In 2023, you gifted each of them a new car, each valued at $50,000. Because your spouse is a US citizen, the unlimited marital deduction is applied and it does not need to be reported. The gift to your child will need to be reported, however, as it exceeds the annual exclusion limit of $17,000. The $33,000 difference will also be applied to your lifetime exclusion.
Read more about the annual exclusion and lifetime exclusion systems below.
How does the gift tax annual exclusion limit work?
The annual exclusion limit is the threshold that determines when you need to file a gift tax return. You usually do not need to file or report gifts that do not exceed the annual exclusion limit. Importantly, the annual excursion limit is counted per recipient/donee, not as a total sum of all your gifts.
If the value of your gifts exceeds the annual exclusion limit, then you will be required to file a gift tax return, and the gifted amount in excess of the annual exclusion will be counted towards your lifetime gift tax exclusion.
Example 1: You gift your friend $17,000 in January 2023. You then gift the same friend another $1000 in July of the same year. The combined total for this recipient exceeds the annual exclusion threshold, so the gifts will need to be reported.
Example 2: You gift family member A $15,000, and family member B $15,000 in 2024. Each of these recipients received less than the annual threshold ($18,000), so you do not need to file a gift tax return.
Example 3: You gift your sibling $30,000 in 2024. The annual exclusion limit is $18,000, so you will need to file a gift tax return. The $12,000 difference ($30,000 - $18,000) will be applied to your lifetime gift tax exclusion.
Note: The gift tax may be offset by the lifetime exclusion amount or other applicable deductions or credits, depending on the individual's specific circumstances. Additionally, tax laws and thresholds are subject to change, so it's essential to refer to the most recent IRS guidance for the latest information.
Exception: Gifts of future interest
Certain gifts, defined as “gifts of future interest”, are not subject to the annual exclusion and must be reported, even if the value of the gift is below the annual exclusion limit. The IRS defines a gif of future interest as:
“A gift in which the donee's rights to the use, possession, and enjoyment of the property or income from the property will not begin until some future date. Future interests include reversions, remainders, and other similar interests or estates.”
How does the lifetime gift tax exclusion work?
In addition to the annual exclusion, each individual is entitled to a lifetime exclusion ($13,610,000 in 2024). If the total value of your lifetime gifts (minus the annual exclusions) exceeds the lifetime exclusion limit, you will owe tax on the value of any future gifts that exceed the annual exclusion limit.
IMPORTANT NOTE: In 2026, the lifetime gift tax exclusion will be reduced to $5,000,000 from the current $13,610,000. This means that with regard to financial planning, the time to give large gifts is now! See more in the Advice and Tips section in the next post.
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