Here are the main tax rules for gifts, including income tax and gift tax.
Table of Contents
Updated November 21, 2023
The main rules for gifts between individuals are fairly simple. These gifts don’t produce deductions for the donor or income for the recipient. And most of the time there’s no gift tax, either. But if you give more than the annual exclusion amount ($18,000 as of 2024) to one person other than your spouse in a single year, you’ll have some planning concerns — and a reporting obligation.
Recipient doesn’t report income
Gifts you receive aren’t considered income. It doesn’t matter how large they are. You don’t report them on your income tax return in any way.
There are a couple of important qualifications on this simple rule:
- True gifts. This rule applies only to true gifts. You can’t avoid paying income tax by calling something a gift when it isn’t. For example, a “gift” you receive in exchange for services or some other consideration isn’t a gift.
- Income after gift. If you receive a gift in the form of income-producing property, you must report any income produced after the gift. For example, if you receive stock as a gift, you must report any dividends paid on that stock after the gift.
- Foreign donor. Certain large gifts or bequests from certain foreign persons must be reported on Form 3520.
Sorry, no deduction
Some people hear that they can give an annual amount to their child “tax-free” and wonder if this means they can claim a deduction for such gifts. We’ll explain below how the annual exclusion amount can keep these transfers free of gift tax. Gifts don’t produce income tax deductions, though, unless we’re talking about donations to qualifying charities.
Basis and holding period
If the gift consists of property other than cash, the basis and holding period of the property will transfer over to the recipient. It’s important for the recipient to know when the donor acquired the property, the cost of the property, and any other information that would affect the property’s basis. Ideally, the recipient of the gift should also receive records that will provide adequate proof of these facts.
It’s also necessary to know the value of the property at the time of the gift. The donor needs this information to determine whether the gift exceeds the annual exclusion amount and, if so, the amount to report on the gift tax return. The recipient of the gift may also need this information to determine whether a deduction is available if the property is later sold at a loss.
Gifts can be used to transfer built-in gain from the old owner to the new one, but the recipient can’t use any loss that was built-in at the time of the gift to claim a deduction.
Although there’s no income tax on gifts, there is such a thing as a gift tax. The gift tax is imposed on the donor. The person receiving the gift does not have to pay this tax.
Most people don’t have to worry about this tax because it generally doesn’t apply until you make gifts exceeding the annual exclusion amount to one person within a single year. And there are other exclusions that often prevent the gift tax from applying. There is an unlimited exclusion for gifts to your spouse. (An annual limit applies if your spouse is not a U.S. citizen.) And there’s an unlimited exclusion for the payment of medical expenses or educational costs, provided you make these payments directly to the service provider or educational institution.
The annual exclusion
The annual exclusion is adjusted for inflation and applies to each person every year. The amount is $18,000 as of 2024.
Example: On December 31 you give $18,000 to your son and $18,000 to your son’s wife. On January 1 (the next day) you give another $18,000 to your son and another $18,000 to your son’s wife. If you made no other gifts to your son or his wife during these two years, all of the gifts are covered by the annual exclusion.
If you’re married, your spouse can also make the gifts described in the example. You and your spouse each have your own annual exclusion amount, even if you file joint federal income tax returns.
Giving more than the annual exclusion amount
If you give more than the annual exclusion amount to one person in a single year you’ll have to file a gift tax return. But you still won’t have to pay gift tax unless you gave a very large amount. The rules let you give a substantial amount during your lifetime without ever paying a gift tax. As of 2024 the amount is $13,610,000.
You don’t use up any of this amount until your gifts to one person in one year exceed the annual exclusion amount described earlier. For example, if you make a $19,000 gift in 2024, you have used up only $1,000 of your lifetime limit.
Any amount you use out of your lifetime gift tax exclusion counts against the estate tax exclusion, which is also $13,610,000 as of 2024. This means that if you use $250,000 of the limit by making gifts during your lifetime, you have reduced by $250,000 the amount that can pass through your estate free of the estate tax.