The Gift Tax Annual Exclusion is a provision under federal tax law that allows individuals to give a certain amount of money or property to another person without incurring gift tax. The annual exclusion amount is set by the IRS and can change over time due to inflation adjustments. As of 2023, the exclusion is $17,000 per recipient per year.
This means that a donor can gift up to $17,000 to as many individuals as they wish in a given year without triggering a gift tax or requiring the filing of a gift tax return. For example, a grandparent could give $17,000 to each of their three grandchildren in one year, totaling $51,000, without any gift tax implications.
Any amount over the annual exclusion limit would require the donor to file a gift tax return (IRS Form 709) and could potentially reduce the donor’s lifetime gift tax exemption. The lifetime exemption allows individuals to gift a much larger sum over their lifetime without incurring gift tax, which was $12.92 million for individuals in 2023. However, gifts above the annual exclusion amount reduce this lifetime exemption.
It’s important to note that this exclusion applies to gifts, which are voluntary transfers of property without consideration. Certain transfers, such as those made for tuition or medical expenses paid directly to the educational institution or medical provider, are not subject to the gift tax and do not affect the annual exclusion.
In Houston, Texas, as with the rest of the United States, individuals must be aware of the federal gift tax rules, as there are no state gift taxes in Texas. Thus, the Gift Tax Annual Exclusion is particularly relevant for residents planning their estate and financial gifts.
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