Taxes 101


5 Tax Tips You Should Keep in Mind for Gift Funds

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5 Tax Tips You Should Keep in Mind for Gift Funds



Are you planning to give someone a gift of money this year? Whether it's a large sum for a special occasion or small monthly gifts, you should know certain tax rules for gifting money to family or friends. Although the gift tax rules can be complicated, taking some time to understand the basics can help ensure you stay in good standing with the Internal Revenue Service. Read on for five practical tips to keep in mind when gifting money this year!

1. Know the annual gift tax exclusion

Understanding the annual gift tax exclusion is essential when gifting money to family and friends. This exclusion enables taxpayers to give away a yearly amount of money without triggering any kind of taxes or filing a gift tax return.

For 2023, the maximum amount allowed under this exemption is $17,000 for each individual recipient per year (up from $16,000 in 2022).

In addition, married couples have the option to "split" the exclusion, enabling them to give up to $34,000 per recipient. 

For example, say you have two adult children and want to gift them both cash to help with a down payment on a home. Assuming you're married and want to split gifts with your spouse, you could give away up to $68,000 in 2023. That's $17,000 from each spouse to each child.

2. Pay education or medical expenses to give more

Another strategy for gifting to family members without triggering gift tax returns is to pay for their medical or educational expenses directly. This is known as making a "qualified tuition or medical expense payment" and does not count toward your annual gift tax exclusion amount.

The key is to pay the healthcare provider, health insurance company, or educational institution directly—you can't gift money to your loved one and let them pay their tuition or medical bills. Also, remember that paying tuition qualifies for this gift tax exemption, but other expenses, such as room and board, books, and housing, do not.

Another option is to contribute money to a 529 college savings plan instead of giving money directly to family members. 

The tax code allows you to "superfund" a 529 plan by giving five years' worth of annual gifts in one year. This means you could give $85,000 to a grandchild's 529 plan in 2023. Remember that you won't be able to make any additional tax-free gifts in the next five years because you've exhausted your annual exclusion for those years.

3. Understand the lifetime gift and estate tax exemption

While the annual gift tax exclusion allows you to make tax-free gifts up to the annual exclusion amount each year, this doesn't necessarily mean you'll have to pay tax on any amount above this limit.

Instead, any gifts over the annual exclusion chip away at your lifetime gift and estate tax exemption. The lifetime gift and estate tax exemption is the total amount you can give away over your lifetime and after you die without triggering any federal estate taxes. For 2023, this amount is $12,920,000 per individual or $25,840,000 for married couples.

For example, say you're single and want to give your adult child $50,000 in 2023. The first $17,000 of that monetary gift falls under your annual gift tax exclusion. But what about the remaining $34,000?

You do need to file a gift tax return using Form 709, but you don't necessarily have to pay gift tax. Instead, your remaining lifetime exclusion will be $12,886,000—that's the $12,920,000 minus the taxable gift.

Of course, federal estate taxes affect a tiny percentage of the population—less than 0.1% of the people expected to die in a year, according to the Tax Policy Center. But that might not always be the case. 

The current lifetime gift tax exclusion is due to return to pre-2017 levels in 2026, meaning it will be cut roughly in half, potentially impacting many more taxpayers than it does now.

If you prefer, you can preserve your lifetime exemption by paying tax when you file your gift tax return.

4. File a gift tax return (if necessary)

Filing a gift tax return is crucial when gifting money over the annual exclusion limit. You must file your gift tax return and pay gift taxes owed by the same deadline as your federal income tax return—typically April 15th of the year following your gift.

If you need more time, you can request a six-month extension by filing Form 8892 by April 15th. However, if you extend your individual income tax return, the extended due date also applies to your gift tax return—no special extension form is needed.

If you don't file a gift tax return when required, the IRS can assess a penalty of 5% of the value of that gift for every month the return is past due—even if no gift tax was due.

When filing a gift tax return, be sure to include all of the necessary details of the gift, including:

  • A complete and detailed description of the gift (if you're not gifting cash)
  • The recipient's name, address, and relationship to you
  • The date of the gift
  • The gift's value on that date

Keep in mind that you don't need to file a gift tax return if you gave a gift to your spouse, a charity, or made a political contribution, no matter the amount.

5. Consult with a tax pro if you have any questions about gift funds

When it comes to gifting money to family and friends, working with a tax professional can help ensure you remain compliant with the various gift tax regulations. A tax pro can provide expert advice on how to structure your gifts so you stay within the limits of the annual gift tax exclusion and help you determine whether you need to file a gift tax return. 

Gifting money can be a great way to show someone you care, but it's essential to understand the applicable tax rules first. By taking the time to familiarize yourself with these tips, you can ensure your gifts comply with IRS rules. 

How can Taxfyle help? 

We understand that taxes are complicated. Rather than stressing yourself out by cramming the latest updates and learning what forms you need to file, file your taxes with Taxfyle and have a CPA or EA do the hard part for you. 

With Taxfyle, you’re connected to a licensed, experienced accountant who is an expert in all things tax and can handle your unique tax needs. That way, rather than worrying about taxes, you can focus on something else while one of our Tax Pros files your taxes for you. 

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Tickmark, Inc. and its affiliates do not provide legal, tax or accounting advice. The information provided on this website does not, and is not intended to, constitute legal, tax or accounting advice or recommendations. All information prepared on this site is for informational purposes only, and should not be relied on for legal, tax or accounting advice. You should consult your own legal, tax or accounting advisors before engaging in any transaction. The content on this website is provided “as is;” no representations are made that the content is error-free.

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February 22, 2023


Janet Berry-Johnson, CPA

Janet Berry-Johnson, CPA


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