Gift tax from parents. Who pays it, when does it apply, and what are the gift tax exclusions?

1 min readLast updated October 4, 2023by Rachel Carey

A gift from mom and dad may always be welcome but be aware—this could trigger a gift tax from parents. However, minimizing this deduction is possible by following the IRS’ rules and exemptions explained below.

What is gift tax? 

The handing on of gifts or wealth from generation to generation is a time-honored tradition, with parents wanting to help or support their children through gifting for many years. 

The Internal Revenue Service (IRS) defines gift tax as the “transfer of property by one individual to another while receiving nothing, or less than full value, in return.”  

Crucially, gift tax applies whether the giver intended the property to be a gift or not. It also includes incomes derived as a result of a gift of property, for example, rental incomes resulting from property transfer. 

It is important to note that gift tax is separate from estate tax, which is a tax on property transfer upon a person's death. 

Do I have to pay gift tax? 

If your parents give you a gift or are thinking of giving one, you may wonder if you need to pay gift tax on it.  

In general, as a gift recipient, you do not need to pay any gift tax. However, your parents may need to pay gift tax if the value of the gift exceeds a certain amount. 

In the US, the IRS allows each person to give a certain value of gifts each year without paying gift tax.  

This is known as the annual gift tax exclusion, and for 2023, it is $17,000 per recipient (rising from $16,000 for gifts in 2022 in line with inflation). This means your parents can gift you up to $17,000 yearly without paying any gift tax. This is per donee, so a parent can gift up to $17,000 per year for each child. 

If the gift value exceeds the annual gift tax exclusion, the donor may need to file a gift tax return and pay gift tax on the excess amount. Although discussing the tax repercussions of a gift with parents may feel like a breach of unspoken etiquette, they will thank you in the long term. 

Some exceptions and exclusions exist to the gift tax rules, such as gifts to a spouse, charitable donations, and payments for medical or educational expenses, detailed later in this article.  

It's therefore important to consult a tax professional if you have any questions about this complicated area of tax law.  

How does the lifetime gift tax exclusion work? 

The lifetime gift tax exclusion allows individuals to make larger gifts over their lifetime without incurring gift tax. As of 2023, the lifetime gift tax exclusion amount is $12.92 million per person. 

What is the lifetime gift tax exclusion? 

When you make a gift that exceeds the annual exclusion amount of $17,000 (as of 2023), it counts against your lifetime gift tax exclusion. 

The total amount of taxable gifts you make during your lifetime is added up to determine if you have exceeded the lifetime gift tax exclusion amount. 

If you exceed the lifetime gift tax exclusion amount, you must pay gift tax on the excess amount. 

Who pays gift tax, and how much is it? 

The donor will generally pay the gift tax only once they have exceeded their annual and lifetime allowances. The actual gift tax rate ranges from 18 percent to 40 percent, depending on individual situations. 

How to avoid gift tax 

It is important to pay taxes on what is legally owed to the IRS, and there is a range of penalties for not doing so. However, it is equally important that you do not over-pay and are aware of exclusions that help avoid gift tax

These exclusions include: 

  1. Annual exclusion: As of 2021, you can gift any individual up to $15,000 per year without paying gift tax. This is known as the annual exclusion. 

  2. Educational and medical exclusions: Payments made directly to an educational institution or a medical provider for someone else's tuition or medical expenses are not subject to gift tax, regardless of the amount. 

  3. Spousal exclusion: Gifts made to your spouse are generally not subject to gift tax as long as your spouse is a US citizen. 

  4. Gift splitting: Spouses can combine their allowances so that the $17,000 limit in 2023 becomes a $34,000 limit when filed together. The lifetime exclusion also doubles for spouses. 

  5. Charitable gifts: Gifts made to qualified charitable organizations are generally not subject to gift tax. 

  6. Political contributions: Gifts made to political organizations or campaigns are not subject to gift tax as long as the organization is registered with the IRS.  

You should also be aware that legislation passed as part of the Tax Cuts and Jobs Act (TCJA) dramatically increased the exemption rates when passed; however, this is likely to end in 2025. Therefore, ensure you maximize gifts before this period.  

So less of a “how to avoid gift tax” and more of a “how to only pay what you legally owe.”  

You must gift a LOT to trigger gift tax payments when considering annual and lifetime exemptions and the other exemptions covered above. The important thing is to ensure you file correctly to avoid falling foul of the IRS. 

You should always consult with a tax specialist on such matters as gift tax from parents—find your match today with Unbiased.

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.