Annual Gift Tax Limits For 2020

Even if you do give outrageously, you wouldn’t have to file a gift tax return unless the gift was more than the annual exclusion limit (the cap on tax-free gifts), which is a whopping $15,000 per person per year. So, for example, you would theoretically be able to give a max of $15,000 to your mom, $15,000 to your brother, and $15,000 to your pal all in the same year without activating the gift tax.

It’s when you give more than $15,000 to one person in a calendar year that this dance gets a little more complicated.

Let’s say you want to help your daughter buy her first home, so you cut her a $30,000 check. To figure out how much is taxable, you’d subtract the annual $15,000 exclusion from the total. In this case, the remaining $15,000 is taxable. So, while you would have to file a gift tax return, you would only be responsible for taxes on $15,000 of the $30,000—or you can apply it to your lifetime gift exclusion (more on that in a minute).

And as an added bonus if you’re married, each spouse is entitled to the $15,000 exclusion. So looking at the same example, you could each give your daughter $15,000 for a total of $30,000 without going over the annual limit.

Lifetime Gift Exclusion

Another way to dance around the gift tax is the lifetime gift tax exclusion. This is the total amount—$11.4 million for 2019 and $11.58 million for 2020—you’re able to give away tax-free over the course of your lifetime and is also shared with the estate tax.

Think back to our first example: You want to give your daughter a gift of $30,000. The first $15,000 would be free and clear of taxes. For the remaining $15,000, you’ll have to file a gift tax return—but you don’t necessarily have to pay taxes on that extra. You can choose to apply that amount to your lifetime exclusion. In this case, you would simply subtract $15,000 from your lifetime cap of $11.58 million, leaving you $11.565 million to work with.

So why the tax return, if you can just exclude the gift tax? It’s simply a way for the IRS to keep track of your lifetime exclusion limit. The more you have knocked off your lifetime exclusion, the less you’ll have left over to protect your estate from getting hit with taxes down the road. Now, this won’t apply to many people, but if you think your estate will blow past that lifetime cap—if so, good for you!—then it might make sense to go ahead and pay taxes on gifts now so that you can protect your estate later.

What Is the Gift Tax Rate in 2020?

If you manage to use up all of your exclusions, you may indeed have to pay the gift tax. If that’s the case for you, buckle up—the actual gift tax rate can vary between 18% and 40% depending on the amount you’re giving. That’s certainly not chump change!

It’s important to remember that gift tax rates can change—and change often—so always be sure you’re working with a tax pro so you’ve got the most up-to-date information.

What Can Be Excluded From Gifts?

While most gifts are technically taxable, there are a few exceptions to the rule. Generally, the types of gifts that would not be considered taxable include:

1. Gifts that don’t go over the annual exclusion for the calendar year ($15,000 as of 2020)
   
2. School tuition or medical expenses you pay for someone (as long as those payments go directly to the educational and medical institutions and not to an individual)
   
3. Gifts to your spouse in any amount if they are a U.S. citizen—if they’re not a citizen, that annual exclusion limit is $157,000 for 2020
   
4. Gifts to a political organization

While we’re talking taxable gifts, it’s important to note that only certain types of gifts can be deducted from your taxable income—usually those are gifts donated to a qualifying charity, called charitable donation. So be sure to do your homework or get with a tax pro to know how your generosity might affect your taxable income.