Federal Gift Taxes: What is the maximum that can be given to children without paying taxes?
US taxpayers are allowed to pass on their wealth to their children and others without incurring a tax bill but only up to a certain amount.
Americans are allowed to give a certain amount of their wealth to their children or others each year without incurring a tax bill. However, should you cross the annual exclusion thresholds you’ll eat into your lifetime exemption amount. Once a taxpayer has used up their Gift Tax exemption it could mean paying a tax rate of up to 40%.
In the United States, federal gift taxes are applied to the transfer of property or money by one individual to another without receiving anything of equal value in return. For 2023, the maximum amount that can be given without paying federal gift tax is $17,000 per year per recipient, it rose to $18,000 for 2024. This is known as the annual exclusion amount.
How much can an individual give away to their children tax-free?
The annual exclusion amount per taxpayer only applies to each recipient. This means that an individual can give up to $18,000 in 2024 to as many people as they wish without incurring a gift tax. But if you give more than $18,000 to any one individual this year, you will need to report the gift to the IRS and may need to pay gift tax on the excess amount.
It’s important to note that the annual exclusion amount is separate from the lifetime gift tax exemption, which was $12.92 million for individuals and $25.84 million for married couples in 2023. The lifetime exemption rose to $13.61 million and $27.22 million, respectively, this year. This means that if an individual gives more than $18,000 this year per recipient, $17,000 in 2023, they will need to use up some of their lifetime gift tax exemption to avoid paying gift tax.
It’s important to note that the lifetime exemption was greatly increased under the Tax Cuts and Jobs Act of 2017 but those provisions will soon sunset. Without any action from Congress, the lifetime exemption 2026 will drop to $5 million, adjusted for inflation.
How much can a couple give away to their children tax-free?
In 2024, couple can give up to $36,000 per year to their children tax-free in the United States. This is because each individual can give up to $18,000 this year to any other individual without incurring federal gift tax. So if a couple gives a gift to their child, each spouse can contribute up to $18,000, for a total of $36,000.
It’s important to note that the annual exclusion amount applies to each recipient, not just each giver. This means that a couple can give $36,000 to each of their children in 2024, $34,000 in 2023, without incurring gift tax, and not be required to submit IRS Form 709 to disclose the gift.
Will the IRS tax gifts that exceed the annual exemption?
Not necessarily. First off, the person giving the gift usually pays if there are any taxes to be collected but that depends on how much is given in any given year and over the lifetime of the giver.
Let’s say that you gave your child $20,000 in 2023. That would be $3,000 above the annual exemption, which will need to be reported to the IRS. If you haven’t surpassed the lifetime exemption, then no worries. However, if you have been exceedingly generous you could face a tax rate between 18 percent and 40 percent.
There are other rules which you should consult and exceptions to giving money or property that can affect your annual tax declaration. You can check out the IRS Publication 525 and keep in mind that your state may have specific rules of its own, especially in relation to inheritance tax. No matter what, you should talk to a tax professional to avoid any unexpected bill from Uncle Sam or your state.