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What are gift taxes and how do they work?

On Behalf of | Oct 10, 2022 | Estate Planning |

When it comes to financial matters, everyone wishes they could pay less in taxes and put more money in their own pockets. With that said, you might feel dismayed at learning that the IRS even has a gift tax policy to which you might be beholden.

The IRS definition of a gift is any transfer of property from one individual to another while receiving nothing, or less than the assets’ full value, in return. If you receive a significant gift as part of an inheritance or for any other reason, you should understand the IRS gift tax policy in full.

Is there a tax on all gifts?

There is a yearly exclusion up to which the IRS will not make note of a gift transfer. For the year 2022, this exclusion is $16,000. This means that the vast majority of gifts come with no tax implications, with most exceptions coming in the form of inheritance as part of a late family member’s estate plan.

What are your gift tax obligations?

Even if you receive a gift exceeding the exclusion amount stated by the IRS for a given year, you might only have extra paperwork to fill out and no tax-paying obligations. However, some states do have an inheritance tax and the IRS will collect tax on any income you earn using the gifted assets. Be aware that there is also a lifetime exclusion in addition to the yearly exclusion, and you may have to pay taxes if you exceed the lifetime amount.

Most gifts, even some exceeding the yearly exclusion, do not require the payment of additional taxes. Even so, it is important to diligently report large gifts as part of your income so as to avoid the possibility of misunderstandings and consequences later down the line.