In a recent update, the IRS has increased the annual gift tax exclusion for parents giving money or property to their children. The limit has risen to $18,000 in 2024, a notable increase from the previous year's cap of $17,000.
The annual gift tax exclusion is a mechanism that permits parents to provide a specific amount to their children tax-free. However, any gifts surpassing the $18,000 threshold must be reported to the IRS, although this doesn't necessarily entail an immediate tax obligation.
Contrary to popular belief, the gift tax extends beyond parental generosity to children. The IRS defines it as a federal tax on the transfer of money or property from one individual to another, where the donor receives nothing or less than full value in return. Typically, the donor is responsible for paying the gift tax, unless special circumstances apply.
In addition to the annual limit, the IRS allows individuals to gift up to $13.61 million over their lifetime without incurring taxes. This is known as the lifetime exclusion. If a gift exceeds the annual limit, the excess is subtracted from the person's lifetime exemption, preventing an immediate tax obligation.
"The IRS has a gift tax limit, both for the amount you can give each year and for what you can give over the course of your life. If you go over those limits, you will have to pay a tax on the amount of gifts that are over the limit," stated SmartAsset in an article about gift tax limits.
Per Recipient Limit and Couples' Combined Allowance
The annual gift tax limit is applied per recipient, allowing parents to give $18,000 to multiple children without triggering a gift tax return. For married couples, each spouse can contribute $18,000 to a single child, doubling the allowance to $36,000.
Should a parent exceed the annual gift tax amount, they are required to submit IRS Form 709 when filing their federal income taxes. It's important to note that this doesn't automatically translate to an immediate tax payment. The excess amount is deducted from the lifetime exclusion, with actual tax obligations only arising when this limit is exhausted.
To illustrate, if a parent gifts their child $40,000, surpassing the $18,000 annual limit, the excess $22,000 is reported to the IRS. While no immediate tax payment is required, the IRS deducts this amount from the lifetime exclusion, reducing the remaining limit for future gifts.
Understanding the intricacies of the IRS gift tax limits is crucial for parents aiming to provide financial support to their children while navigating the complex terrain of taxation regulations.
