How to Calculate an IRS Gift Tax

by Madison Garcia ; Updated June 27, 2018
How to Calculate an IRS Gift Tax

Most gift-givers won't ever have to pay gift tax. The Internal Revenue Service allows individuals a hefty lifetime gift exclusion along with an annual gift exclusion, so you'll pay gift tax only after giving away millions. If you do exceed the limits, the amount of gift tax owed is the excess of the gift over your annual exclusion multiplied by the current gift tax rate.

Basic Calculation

The IRS allows individuals a lifetime exclusion of $5.49 million as of 2017 and $11,180,000 as of 2018. That means that you can give away up to that much money in your lifetime and not pay a dime of gift tax. In addition, you may gift up to $14,000 per recipient per year as of 2017, and $15,000 per year as of 2018, without dipping into your $5.43 million allowance. After using up your lifetime allowance, any amounts above the annual exclusion are taxable. For example, say you're used up your lifetime exclusion and you give your three children $10,000 apiece. Since each gift is less than $15,000, you owe no tax. However, say that instead you give $30,000 to just one child. In this case, $15,000 ($30,000 minus the $15,000 exclusion) is taxable. The tax owed would be $15,000 times the gift tax rate, which ranges from 18 percent to 40 percent.

Gift Tax Exclusions

In addition to the annual exclusion per recipient, certain other gifts are excluded from the gift tax equation. Any gifts given to your spouse, political organizations, or for medical and tuition payments are excluded. If you want to exclude medical and tuition payments, the payments must be made directly to the institution itself. For example, you could pay a university directly for your child's tuition or pay your mother's health insurance bill directly to her provider.

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Non-Cash Gifts

Along with cash payments, non-cash gifts are also taxable. If you gift an asset, like a car or a house, the monetary value of the asset is its fair market value at the time of the gift. Fair market value is the price a buyer and seller would agree upon in a normal market transaction. If you're planning on giving away an asset, obtain an appraisal of the property and use the figure provided as fair market value.

Filing a Gift Tax Return

You need to file a gift tax return only if you've exceeded your lifetime exclusion and your annual exclusion. In other words, you need to file a gift tax return only if you will actually owe gift tax. The gifter, not the recipient, is responsible for filing the gift tax return and paying the gift taxes. To file a gift tax return, complete Form 709 when completing your annual tax return. You'll need to attach copies of any relevant documentation, like copies of appraisals and documents related to the transfer of gifts.

About the Author

Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.

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