Taxes on Gifted Money: What Is It and How It Works? 

You heard the term taxes on gifted money while attending a conference arranged by top businesses. But you’re unsure what it means, and the concept of gift tax seems complex.

Learning about taxes on gifted money is essential, especially if you plan to give or receive gifts of significant value. Knowing the basics helps you avoid unexpected tax issues and comply with tax regulations.

In this guide, we’ll walk you through what taxes on gifted money mean and how they work. We’ve also included major examples to help you understand this topic and prepare you to manage similar situations.

What Is Meant by Taxes on Gifted Money? 

When a person gives money or property to another without expecting something in return, they may be responsible for a federal tax known as the gift tax. This tax applies to a range of gifts, such as cash, real estate, or valuable items, and it’s usually the giver’s responsibility to pay, not the recipient’s. 

Taxes on gifted money can start at 18% and reach up to 40% based on the gift’s value. There is an annual exclusion limit, allowing gifts up to a certain amount to be tax-free. Additionally, some gifts, like those for education or medical expenses, aren’t subject to gift tax requirements.

Let’s consider a common example of taxes on gifted money to understand how the rules apply. Consider John gifting £25,000 to his niece in 2024. The annual exclusion limit was £18,000; £7,000 of that gift would be taxable or reduce his lifetime exemption. 

What Are Taxes on Gifted Money and How They Work?

Are you struggling to understand taxes on gifted money? We are here to make things easier for you and have elaborated on it in this article. For now, look at the basic sections of taxes on gifted money along with their brief elaborations.

Limits Set by IRS on Taxes on Gifted Money 

The Internal Revenue Service (IRS) sets two kinds of limits on taxes on gifted money. Both gift taxes have pros and cons; you can choose any of both according to your feasibility.

Here’s a breakdown of annual and lifetime gift tax exclusion, and for better understanding, we’ve also included their examples.

Annual Gift Tax Exclusion 

The IRS allows people to give away a certain amount of money or assets each year tax-free, known as the annual gift tax exclusion. For 2024, individuals can give up to £18,000 per person without paying gift tax. This rule applies no matter how many people receive the gift, helping minimize taxes on gifted money.

For example, if Robert gives £18,000 each to ten friends, he won’t owe any gift tax on these gifts. But if he gives each friend £20,000 instead, he exceeds the annual exclusion limit by £2,000 per person, totaling £20,000 in taxable gifts.

Married couples can also benefit from this exclusion by combining their limits, allowing them to give up to £36,000 per recipient tax-free each year.

Lifetime IRS Gift Tax Exemption 

If a gift goes over the £18,000 limit for 2024, it does not always trigger the gift tax. Instead, the IRS allows individuals to give up to £13.61 million in assets throughout their lifetime. However, if someone gives a gift that exceeds the annual limit, that amount simply reduces their lifetime exemption. No taxes are owed immediately.

For example, if Maria buys her daughter a £25,000 car for her birthday, she exceeds the annual exclusion limit by £7,000. However, Maria does not owe any gift tax. She will report the gift on IRS Form 709 and subtract the £7,000 from her lifetime exemption. This means she can still give away up to £13,603,000 without incurring taxes on gifted money.

How to Calculate the IRS Taxes on Gifted Money? 

Calculating IRS taxes on gifted money is simple, especially for wealthy individuals. Only those giving away large amounts are subject to the federal gift tax, which is similar to income tax rates and can reach as high as 40%. As the gift amount increases, so does the potential tax owed.

However, no taxes are due until gifts exceed the lifetime exemption limit. In 2024, this limit allows individuals to give away up to £13.61 million without paying taxes. After surpassing this limit, the taxes on gifted money apply to gifts that exceed the annual exclusion limit of £18,000.

When you use a gift tax calculator, you start by calculating the total gifts given in a year and subtracting the annual exclusion amount. If the remaining amount exceeds the lifetime exemption, you apply the appropriate tax rates to the excess. 

Taxes on Gifted Money Planning Strategies 

Handling your gift taxes can also be difficult for some individuals, and some may want to plan them. Planning in advance is always beneficial and you don’t need to panic at the last moment. It also allows you to maximize your gifting potential while minimizing tax liabilities. 

Additionally, effective planning helps you maintain control over your assets and ensures that your loved ones receive financial support without unexpected tax burdens. Here are some taxes on gifted money planning strategies to help you out:

• Consulting with a tax advisor can help clarify complex gift tax rules. They can guide you on the best strategies to minimize your taxes on gifted money.
• A gift tax calculator can help you estimate potential taxes owed. Just enter your gift amounts and recipients to see if you exceed the annual exclusion or lifetime exemption limits.
• Timing your gifts strategically can help reduce taxes. For example, giving smaller gifts over several years may help you avoid exceeding the lifetime exemption.
• You can directly pay educational and medical expenses without triggering gift tax. These payments are exempt from gift taxes and can support your loved ones.

Conclusion 

Understanding taxes on gifted money is essential for anyone planning to give several gifts. Knowing the regulations can help you plan better and avoid unexpected tax burdens.

To maximize your gifting strategy, consider giving gifts at a young age. As a result, you can see the benefits of your gifts while you’re still alive. Additionally, review your gifts annually to adjust for any changes in tax laws or limits.Lastly, be aware of state gift tax laws. Some states have their regulations that could impact your gifting strategy.

Staying informed about these rules can prevent surprises and ensure your financial plans remain effective and compliant.