Generosity might be a virtue, but the federal government might tax you for expressing it in the form of a gift. You won't get in trouble for buying lunch for a co-worker, but if you're going to make substantial gifts, you need to know how much you can give before you owe Uncle Sam a share of your largesse.
There's an annual amount that you can give per person without gift tax consequences. Once you exceed that, gifts count against a lifetime maximum amount that you can give people while you're alive or leave behind in your estate when you pass away.
Lifetime and Annual Gift Tax Limits
The annual exclusion allows you to give a certain amount to each person every year without making a taxable gift. The amount is indexed for inflation; for the 2017 tax year, it sits at $14,000 per year and for 2018, . The exclusion applies separately to each person you give money to during the year. For example, if you give $10,000 to your friend, your nephew and your neighbor, all three are under the exclusion, so you haven't made any taxable gifts.
In addition to the annual exclusion, you're allowed to give away a certain amount during your lifetime without actually having to pay any gift taxes. For the 2017 tax year, you can give away $5,490,000 before you start owing gift taxes, or $11,180,000 starting in 2018. For example, say you haven't made any taxable gifts in the past. If you wrote your friend a $25,000 check in 2018, the first $15,000 would be covered by the annual exclusion, leaving an $10,000 taxable gift that requires you to file a gift tax return. But, since you haven't used up your lifetime exclusion, you don't actually owe the Internal Revenue Service. Instead, your lifetime exclusion drops from $11,180,000 to $11,170,000.
The IRS also exempts certain types of gifts from the gift tax entirely. You can give as much as you want to charity, political organizations and your spouse – if your spouse is a U.S. citizen – and not owe any gift taxes or use any of your lifetime exclusion. If your spouse isn't a U.S. citizen, you can still give up to $152,000 without owing or using your exemption. In addition, any medical or education costs you pay directly for someone else – by writing a check to a college for your nephew's tuition, for example – is also a tax-exempt gift.
Exceptions for Spouses
If you're married, you and your spouse can each give up to the annual exclusion for each person and not have any taxable gifts. Through a mechanism known as gift splitting, either spouse can gift up to twice the annual exclusion and then have the gift treated as being made one-half by each spouse when you file your gift tax return. For example, say you give $20,000 to your friend. If you don't gift split, the last $5,000 is a taxable gift. But if you and your spouse agree to split, the gift is treated as being your contribution of $10,000 and your spouse's $10,000 share; both gifts are now under the annual exclusion.
2018 Tax Law Changes
As of 2018, the annual gift tax limit is increasing to $15,000 per person, and the lifetime maximum gift amount is $11,180,000 for gifts that exceed the annual limit and your estate on passing away. The federal estate tax, sometimes called the death tax, only affects estates larger than that amount.
The 2018 limit for gifts to a noncitizen spouse is $152,000 per year.
2017 Tax Law Situations
For gifts given in 2017, the first $14,000 per person was exempt from gift tax under the annual gift limit for 2017. The lifetime limit for people who passed away in 2017 was $5.49 million, and the annual noncitizen spousal exemption was $149,000.