What is the annual gift tax exclusion?
The annual gift tax exclusion is one of the most significant ways you may be able to reduce your federal gift tax liability. The annual gift tax exclusion currently allows you to give $17,000 (in 2023, $16,000 in 2022) to an unlimited number of donees (persons or organizations you give to) without incurring gift tax. You can double that amount if your spouse consents to split the gift.
Tip: The annual gift tax exclusion is indexed for inflation. The exclusion amount for 2023 is $17,000, but this amount may change in future years. The annual gift tax exclusion is important because it allows you to:
- Distribute your property gift tax free
- Potentially put your taxable estate into a lower tax bracket by removing assets from your estate
Caution: If you give less than the maximum exclusion allowed to anyone in a given year, the exclusion is limited to the actual amount of the gift.
What is required to use the annual gift tax exclusion?
The gift must be a present interest in property
A present interest means that the donee has the unrestricted right to the immediate use, possession, or enjoyment of the property, or income from the property from the moment the gift is given. The exclusion is not available to gifts of future interests in property. A single gift may be part present interest and part future interest. In this case, the present interest portion of the gift qualifies for the exclusion.
Example 1: Andy gives one of his original paintings to a collector on the condition that he is allowed to keep the painting until his death. The gift is a future interest and does not qualify for the exclusion.
Example 2: Hal sets up a trust and funds it with $100,000. He provides that all the income from the trust is to go to his son, Hal Jr., for a period of 20 years. After 20 years, the principal (remainder) of the trust is to go to his daughter, Liz.
Hal Jr. has a present interest because he has an immediate right to the income stream for the next 20 years. The value of that right is determined by an actuarial table issued by the IRS. This amount qualifies for the exclusion.
Liz has a future interest because her right to enjoy the principal is delayed for 20 years. The exclusion does not apply to this portion of the gift.
Tip: Gifts to minors (generally, under age 18) can, by their nature, present future interest problems. The IRS provides special methods for qualifying such gifts for the exclusion, including a Section 2503(b) trust, a Section 2503(c) trust, a Crummey trust, and the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act (depending on the law of your state).
Caution: Personal checks that have not been cashed at the time of your death do not qualify for the exclusion. If you are making gifts of personal checks near your death, be sure to have the donees cash the checks immediately or to give the donees cashier's checks instead of personal checks.
The donee must be identifiable
A gift in trust is considered to be a gift to the beneficiaries of the trust. A gift in trust that gives the trustee discretion over the distribution of income or principal to the beneficiaries does not qualify for the exclusion because it is not possible to identify and value the gift to each beneficiary. If, however, the trustee does not have such discretion, and the identity and value of each gift is determinable, then the exclusion will be allowed for each beneficiary.
The value of the gift must be ascertainable
If you can divert gift income from the donee, or it is not possible to value the gift at the time it is given, the exclusion will not be allowed.
What else should you know about the annual gift tax exclusion?
You don't need to file an annual gift tax return with respect to gifts that are within the exclusion unless you have split gifts with your spouse or you have made a partial interest gift to charity (a partial interest gift is split between charitable and noncharitable beneficiaries).
Gifts you make to your spouse or to charity are already fully deductible under the unlimited marital deduction and the charitable deduction.
Gifts you give to your non-U.S. citizen spouse qualify for a $175,000 annual gift tax exclusion in 2023 (up from $164,000 in 2022), but no unlimited marital deduction is allowed. The exclusion may also reduce the federal generation-skipping transfer tax.