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It is very rare for an ordinary household to owe money on gifts.
The gift tax has a somewhat complicated two-tiered structure. Each year you can declare an annual amount (the “annual exclusion”) without paying or even reporting anything on your taxes. Then you will have a significantly higher total amount that you can give away during your lifetime without owing tax (the ‘lifetime exclusion’). If you give away your entire lifetime exclusion in a given year, you will owe gift taxes on any amount you donate over the annual exclusion. The result is that the IRS taxes only one-for-one gifts worth $18,000 in 2024. By 2025, that will increase to $19,000. But the lifetime exclusion must also be taken into account, and there are ways to give couples more.
For example, suppose you want to give $65,000 to your daughter and her husband. In most, but not all, cases you will not owe any tax. In some cases, you may need to file some additional paperwork with the IRS, even though you don’t necessarily owe any money. Here’s what you need to know. You can also use this free tool to match with a financial advisor if you are interested in personal financial guidance.
Gift and inheritance taxes are a joint tax that is applied to all unilateral transfers. This means that it can apply when you gift someone property without receiving anything of equal value in return. In most cases this involves three situations:
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Inheritance: Transfers made through your estate after your death
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Gifts: Transfers made without receiving anything in return
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Peppercorn transfers: transfers made in exchange for assets of significantly lower value
The term “transfer of peppercorns” or “promise of peppercorns” is a legal expression. It refers to selling something in exchange for a peppercorn, which means you technically get something in return, but nothing of any real value. For example, suppose you have a house appraised at $500,000, and you sell it to your friend for $10. While this would technically be a sale rather than a gift, it would also constitute a gift worth the $499,990 you actually gave them.
When the gift tax applies, it is imposed on the person making the gift, and not on the person receiving the gift. Gift tax has rates ranging from 18% to 40% of the taxable donation. However, most people will never pay the gift and inheritance taxes. The reason for this is the tax exclusions.
The gift tax has two major exclusions: the annual and the lifetime exclusions. In any given year, you only pay tax on the portion of a gift that exceeds that year’s annual exclusion, and only to the extent that such gift also exceeds your remaining lifetime exclusion.