Do I need to report gifts and pay gift tax to the IRS?

A "gift," for tax purposes, is the transfer of money or property where less than full consideration is received in return. Individuals are generally not required to report gifts they receive on their federal income tax return.

Rather, if there is a reporting requirement, the donor is responsible to file a separate gift tax return, Form 709. If tax is due, the donor pays the tax.

Donors can avoid triggering the gift tax return filing requirement by staying below the annual exclusion. For 2024, the annual exclusion is $18,000 per recipient. Married couples can give up to $36,000 per recipient. Hence, a married couple could give each of their three children $36,000 per year without filing a gift tax return. Or each of their six children, etc.

Keep in mind, you can also give a gift to the spouse of your adult-child. I see this arise occasionally when a parent seeks to help the family of a married adult-child in excess of the annual exclusion but does not want to file a gift tax return. You could give two gifts, one to the adult-child and one to her spouse, both of which could be deposited into the married couple's joint checking. Whether this is an advisable strategy or not should be examined on a case-by-case basis, factoring in the reliability of the adult-child's spouse.

Even when a gift tax return is required to be filed, the donor rarely owes gift tax. All donors are eligible to take a basic exclusion for amounts reported on the gift tax return. In 2024, the basic exclusion amount is $13,610,000 per person. Essentially, the gift tax return keeps a running-tally of the total gifted amounts (in excess of the $18,000 annual exclusion) for the life of the donor, and the tax will not apply until this amount exceeds the basic exclusion. Again, for married couples, each spouse is eligible for their own basic exclusion.

One last point: the IRS may recategorize a loan to a family member or friend as a gift, triggering the gift tax return filing requirement. Loans to family members and friends should always be documented in writing and include periodic payments with interest. It is recommended that at a minimum you include an interest rate equal to the then-prevailing Applicable Federal Rate, which is posted by the IRS each month here.

So, summing-up, do I need to report gifts and pay gift tax to the IRS? The answer really depends on the amount of the gift. If you are unsure and still want more information, we welcome the opportunity to help!