The Misunderstood Gift Tax: What You Should Know

When it comes to money and building wealth, the gift tax is often misunderstood. Let’s drill down to the bottom of this “gift tax” and find out everything you need to know.

What is a Gift Tax?

The 2019 annual gift tax limit is $15,000 per person or $30,000 per married couple. What do these limits actually mean? It means that a person can give away $15,000 to anyone and to as many people as they would like without having to file IRS form 709 with their taxes.

The reason there is a gift tax is to prevent wealthy folks to give away large swaths of their money to avoid estate taxes at death. Gifting, however, is still a great way to reduce your estate tax limit if you happen to have that much money. The 2018 federal estate limit before incurring taxes is $11.18 million per person or $22.36 million per married couple. It’s also important to note that married couples can share this estate limit. When one partner dies, the other partner may have their $11.18 million plus whatever the other partner didn’t fully use.

What is a Gift?

So you understand the general premise of the gift tax, but there’s another important piece of the puzzle: understanding how the IRS defines a gift. A gift is anytime there is a transfer of cash or property without receiving something of equal or fair market value in return. Many of us give gifts to friends, family, co-workers, and staff. But we don’t generally buy gifts that cost more than $15,000 (if you do, let me know how I can be friends with you!). The gift limit generally applies toward family members. If Allison gives her son Tim a home that is worth $200,000, then she has given him a gift of $200,000.

While this scenario is unlikely, it is becoming more common for parents to help children with affording homes. Here’s another scenario in which the gift tax matters: If Allison sells Tim a home for $50,000, but it is worth $200,000, then Allison gave Tim a gift of $150,000. Another gift scenario that many folks may not be aware of are loans to friends and family that are interest free or below the IRS Applicable Federal Rate. The IRS views these as gifts, not loans. So if you would like to loan money to a friend or family member, you must charge them a minimum amount of interest and report it on your taxes.

Married Couples and the Gift Tax

Married couples, rejoice! One notable perk of being married is the ability to give each other unlimited gifts to your spouse. This only applies, though, if your spouse is a U.S. citizen. If your spouse is not a U.S. citizen, then you are limited to giving them $152,000 a year. But wait? Maybe you’ve heard there’s a limit. This limit doesn’t involve gifts between spouses, but rather when one spouse or the couple gives a gift to someone else. Here’s how it works: The $30,000 per married couple gift limit comes into play when the gift comes from one spouse’s bank account but is from the couple. For example, Carol and Jim are married. Carol gives $20,000 to her daughter Janet. $20,000 is over the $15,000 gift limit for an individual. So that would be an issue. However, since Carol is married, the gift can be from the couple and falls within the $30,000 limit. You are supposed to file this “split gift” on IRS Form 709.

The Gift Tax: Misunderstood

Notable Exceptions to the Gift Tax

There are exceptions to the gift tax limit. Phew! Here’s some of the most common exceptions: We all know that donations to qualified non-profit organizations don’t incur a tax. So do gifts to political organizations. Payments made directly educational institutions for tuition for private school, college etc. are also exempt from the gift limit. Another notable exception is direct payments for medical care. To recap, these exceptions include:

  1. Gifts to non-profit organizations
  2. Gifts to political organizations
  3. Tuition
  4. Direct payments for medical care

Children and the Gift Tax Limit

The gift limit mainly comes into play for us when it comes to funding our children’s education. Many of us contribute to a 529 plan to pay for college. Did you know that your contributions to a 529, ESA, and perhaps a UTMA are all subject to the annual gift limit? One exception to the annual limit is the ability to frontload your child’s 529 with 5 years worth of contributions. This means you can contribute $75,000 (5 x $15,000) or $150,000 if married (5 x $30,000) at once. You won’t be able to contribute again for 5 years. Note: That this means you have used up the gift limit for all gifts, such as funding an ESA, UTMA, etc.

You’re Unlikely to Pay the Gift Tax

Very few of us will ever need to worry about actually paying a gift tax. Even when you go over an annual limit and file IRS Form 709, all it means is that you are reducing your federal estate limit by the amount you over-gifted. In other words, a gift tax is not calculated until you die. In which case, you won’t care about owing anything anyway.

What does this actually look like? Let’s suppose that you gave your daughter Susan $50,000 and filed Form 709 for the $35,000 that was over $15,000 limit. This means that your federal estate limit is now $11.18 million LESS $35,000, or $11,145,000. Clearly, there is still plenty left!

Final Thoughts on The Gift Tax

Tax law is complicated. The rumors and myths that swirl around it muddy the waters even more. However, most of us can breathe a sigh of relief. It would be unlikely for the gift tax to apply to us. Still, arming yourself with accurate information and making sure you know the exceptions to the gift lax laws should help you see through the speculation around gift taxes.

Did you know the gift tax was so misunderstood?


  1. Xrayvsn on December 25, 2018 at 12:31 am

    Excellent discussion and you are correct that the gift tax can be quite misunderstood.

    I always wondered about the 5 year front loading for a 529 college plan for example. Say you front loaded 5 years worth and then they raise the contribution limit like they did this year from $14k to $15k. Do those who front loaded already miss out on the increase? Or can they make up the difference with a current contribution?

    • Miss Bonnie MD on December 26, 2018 at 10:06 am

      Good point. Not sure but if you indeed frontloaded it to the max x 5 years doubt you’ll need to contribute anymore!

    • nachos31 on December 30, 2018 at 9:30 am

      If the limit increases, then you CAN make up the difference but I think only for the years in which the increase would have been applicable.

  2. The Sunday Best (12/30/2018) - Physician on FIRE on December 30, 2018 at 3:56 am

    […] Conversely, the IRS can “penalize” you for giving generously to friends and family, but the way this works is often misinterpreted. Miss Bonnie MD is here to set you straight: The Misunderstood Gift Tax. […]

  3. Financial Samurai on December 30, 2018 at 7:23 pm

    Do you think the IRS will even check? Seems unlikely.
    Less than 1% pay an estate tax upon death so I wonder what folks are worried about. Hmm.

    • Miss Bonnie MD on January 2, 2019 at 8:40 pm

      I don’t think the IRS Gift Tax police go after most people … probably only the very very rich. I think it is more likely an issue if you were audited for some other reason.

      • Anne Schachter on January 8, 2019 at 9:16 am

        if your assets are in a trust, after you die the trust gets a tax ID number (because you can’t use a dead person’s social security number)….there is a trail with the tax ID number. That is one way they can identify estate taxes owed if applicable. The other thing to remember is the estate tax exemption is a moving’s big now, may be very teeny tiny by the time i die….so asset planning is an ongoing effort……

  4. […] plan for a child is considered a gift. Gifting beyond $14,000 per parent is generally subject to a gift tax.  The IRS makes an exception for 529 Plans and will allow you to gift up to five years at once […]

  5. […] plan for a child is considered a gift. Gifting beyond $14,000 per parent is generally subject to a gift tax.  The IRS makes an exception for 529 Plans and will allow you to gift up to five years at once […]

  6. Journal Club 1-24-19 | Passive Income M.D. on January 24, 2019 at 5:01 am

    […] probably didn’t give or receive any gifts of $15,000 it’s still worth understanding how The Misunderstood Gift Tax works. Miss Bonnie MD explains it quite […]

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