The Annual Gift Tax Exclusion

The Internal Revenue Code imposes a gift tax on property or cash you give to any one person, but only if the value of the gift exceeds a certain threshold called the annual gift tax exclusion. You can give away the amount of the exclusion each year without incurring a tax—and yes, you are responsible for paying it when and if it comes due, not the recipient of the gift. 

The annual gift tax exclusion was indexed for inflation as part of the Tax Relief Act of 1997, so the amount increased in subsequent years to keep pace with the economy. Below is a chart that shows the increases in the annual exclusion from 1997 through 2018. The exclusion has remained steady for several spans of years, increasing in 2002, 2006, 2009, 2013, and 2018. It can only increase in increments of $1,000.

Don't confuse the annual gift tax exclusion with the lifetime gift tax exemption, which is entirely different and much more complex. 

Here's how the annual gift tax exclusion works. You can give anyone up to $15,000 in 2018 without paying a gift tax. Because this is an annual exclusion, you could gift $15,000 on December 31 and another $15,000 on January 1 without breaking the rules or incurring a tax. If you gave $16,000 on December 31, you would owe a gift tax on $1,000, the value above the exclusion amount at a potential top tax rate of up to 40 percent. The gift does not have to be made in one lump sum. The tax also comes due if you cumulatively exceed the exclusion amount, so if you give someone $2,000 a month for 12 months, you'll owe the gift tax on the balance of $9,000. 

The IRS defines a "gift" as anything for which you don't receive full consideration in return. If you sell a piece of property to your niece for $100,000, but the property appraised at a fair market value of $200,000, you've given a gift of $100,000. "Fair market value" is defined as what someone would reasonably pay for an item in a reasonable exchange when neither the buyer nor the seller were under pressure to pay too much or sell for too little. Of course, cash is a dollar-for-dollar value against the exclusion.

These rules don't apply to everything and everyone. You can make unlimited gifts in the form of tuition and other qualified educational expenses and medical expenses if you pay the learning institution or the care provider directly. If you pay schooling or doctor bills on someone's behalf it's not a gift and does not count against the exclusion amount. You can make unlimited gifts to political organizations and to your spouse, provided your spouse is a U.S. citizen.