Gift: Meaning, Tax Considerations, Example

What Is a Gift?

A gift is property, money, or assets that one person gives to another while receiving nothing or less than fair market value (FMV) in return. Under certain circumstances, the Internal Revenue Service (IRS) collects a tax on gifts. Transfers of money or property that are given freely or exchanged for less than market value may be subject to the gift tax if the donor has exceeded the annual or lifetime gift exemption.

How a Gift Works

A gift differs from other types of financial vehicles, such as investments and loans, because a gift, in the strict technical definition, does not involve any expectation or obligation of repayment or a profit in return. A gift in its purest sense is given as a philanthropic gesture or an act of generosity. A gift can also be given to a charitable organization so the donor can benefit from tax deductions.

In the eyes of the IRS, some gifts are tax-free for both the donor and the recipient, but certain gifts may be subject to taxes.

Gifts and Tax Considerations

A financial gift can involve specific tax implications for the parties involved, although this tends to mainly impact the person or party who provided the gift. Tax penalties or implications generally don’t apply to relatively small gifts, so you would only need to worry about a tax fee kicking in if you give a financial gift of a substantial amount.

For the 2022 tax year, the annual gift exclusion is $16,000 or less made in a single calendar year by an individual and $32,000 from a couple making a gift using money from joint resources or assets. In 2023, the annual exclusion amounts for individuals and couples increase to $17,000 and $34,000, respectively. The thresholds are applied to each person who is the recipient of a gift—meaning you could give up to $16,000 each to any number of people without tax consequences in 2022.

There is also a lifetime gift exclusion, which is an amount that you are allowed to give over the course of your life that is excluded from gift taxes. In 2022, there is a cap of $12.06 million (increasing to $12.92 in 2023) on lifetime gifting. That means the total amount of gifts given in your lifetime under those amounts are excluded from being considered by the IRS for gift taxes.

Special Considerations

If you receive a gift, you generally aren't required to report it as income. The gift-giver is responsible for paying any tax and filing a gift tax return. Gifts of any amount to spouses or political organizations, and payments of tuition and medical expenses on behalf of others, are generally not taxable as gifts.

In the case of gifts used for medical or educational expenses, the gifts must be paid directly to the hospital, school, or other providers in order for the tax exclusion limits to be inapplicable.

Example of Gifts

An example of a gift is a wedding gift made to a newly married couple. In some cases, this may take the form of an object, such as an expensive vase or cutlery, to help the couple set up their home.

Others may prefer to hand out cash gifts by stuffing envelopes with money. As long as the fair market value of gifts, made either in cash or any other format, does not exceed $16,000 in 2022 or $17,000 in 2023, they are not required to be reported to the IRS.

Gifts can also be made in other forms. Suppose Steven's father gifts him $13 million on his 17th birthday in 2023. The gift is subject to IRS taxes because it exceeds the $12.92 million lifetime tax exemption limit.

Consider another case, where Steven's father gifts him $16,000 each year from the day he turned one and continues the practice until the age of 25. This gift does not need to be reported to the IRS because it does not exceed the $16,000 annual limit.