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The Rules of Gifting for the Season of Giving


I don’t know if it’s just me, but it feels like gift giving is more complicated than it should be. Trying to think of a creative, personal gift at least twice a year really stretches the brain. Plus, this year we apparently aren’t going to be able to rely on our accustomed two-day shipping because of supply chain issues?! It really makes me miss the days when choosing a present for my dad only involved me picking out the craziest tie in the store. (Looking back on that now, he never needed to wear a tie to the office, so I have no idea what use he got out of all my gifts.)
And, as if picking out a gift isn’t already hard enough, even the IRS has weighed in on gift giving etiquette! While I may not be the best person to help you choose between a portrait of a dog or a gift card to Chipotle for your relative’s Christmas gift (My vote would be a portrait of the dog.), I can help you navigate IRS gift tax rules as we enter the season of giving.

Gifting Basics

Let’s start with the basics first. Gift tax rules are in place to prevent taxpayers from giving away their assets before they die in order to avoid federal estate tax. In 2021, individual taxpayers can gift up to $15,000 (or $30,000 jointly with their spouse) to any number of people per year before they are required to file a gift tax return to report the gift. Each reportable gift lowers the taxpayer’s lifetime gift and estate exclusion. For example, if you give $18,000 to three people in 2021 ($54,000 total), you’d have $9,000 of reportable gifts that would count against your lifetime exclusion, while the remaining $45,000 is excluded from your estate for good.

Upon the taxpayer’s passing, the remaining exclusion amount is applied against their estate and any excess is considered their taxable estate. The lifetime exclusion amount is currently $11.7 million per taxpayer, meaning any taxpayer will face no gift tax until they have gifted over $11.7 million in reportable gifts during their lifetime. They also will face no estate tax unless their estate is over $11.7 million, less the amount of reportable gifts during their lifetime. The excess over the lifetime exclusion will be taxed at a 40% rate.1

What Are Gifts?

The IRS considers any transfer of property where an equal value is not returned as a gift. Examples of gifts include:

  • Cash for a down payment
  • Adding a joint tenant to real estate or a joint owner to a bank account
  • Selling your house for less than the fair market value
  • Paying a debt owed by someone else
  • Interest free loans or forgiving a prior loan

The IRS does have exceptions for gifts that are not considered taxable gifts and therefore won’t be applied against your lifetime exclusion:

    • The $15,000 annual exclusion discussed previously
    • Gifts to your spouse
    • Support provided to a dependent
    • Tuition paid directly to an institution on behalf of someone else (books, room and board, and other education expenses do not qualify)
    • Gifts made directly to qualifying charities
  • Medical payments made directly to the medical provider or health insurance provider on behalf of someone else

When Gifting Makes Sense

Gifting during your lifetime can make a lot of sense – not only for being able to experience the joy your generosity can bring, but also as a way to potentially mitigate the risk of estate taxes. $15,000 a year across numerous family members can make a decent dent in your estate, especially when accounting for future investment or interest appreciation.

Gifts to a Section 529 college savings plan receive a special treatment that allows taxpayers to front load the plan while avoiding any gift tax consequences. The IRS lets taxpayers make up to five years’ worth of the annual exclusion, or $75,000, in one year and elect to treat the payment as if it was made over five years. This avoids having to use your lifetime exclusion. Note that the taxpayer would not be eligible to gift any additional amount during that five-year period, or it would be considered a reportable gift.

What to Watch Out For

The current individual lifetime exemption amount of $11.7 million is set to be reduced by 50% at the end of 2025. However, any gifts given before the reduction in the exclusion (between 2021 and 2025) will not count against the lowered exclusion.

A common slip-up many taxpayers make is gifting appreciated assets toward the end of their life instead of holding onto the asset and gifting the asset via inheritance. Assets received by inheritance receive a step-up in basis to their fair market value at the date of death. This allows any appreciation on the asset, as of the date of death, to avoid capital gains tax (but not estate tax). Any appreciation after the date of death would result in a gain and be subject to capital gains tax.

Compare this to gifting an appreciated asset. If gifted, the recipient will take on your cost basis and holding period of the asset. This means that once they sell the asset, they will have to pay tax on the entire gain. Many parents will gift their house to their kids instead of keeping the house in their estate and having their kids inherit the house. This could cost the kids a great deal in excess taxes if they sell the house.

Another item many taxpayers skip over is completing appraisals of gifted assets, specifically closely-held companies or real estate. Failing to appraise your gifted assets could lead to underreporting the fair market value of the gifted property, thus underreporting the gifts. Failing to take this step could lead to the IRS examining your gift tax returns and decreasing the taxpayer’s lifetime exclusion.

Will This Affect Me?

A 40% tax on assets that you want to leave to your loved ones does seem quite harsh. However, per the Tax Policy Center, only 1,900 of the 2.8 million people who died in 2020 were subject to the estate tax, or less than 0.1%.2 This stat clearly emphasizes that the overwhelming majority of taxpayers will not have taxable estates.

However, just because you don’t anticipate having a taxable estate doesn’t mean you don’t need to have an estate plan! Having basic estate planning documents in place will allow you to ensure your assets are distributed in line with your wishes, avoid many of the hassles and expenses of probate, protect you in the event you become incapacitated, help minimize income taxes, and, most importantly, provide you and your loved ones with peace of mind.

Gift Tax Reporting

If you do have a reportable gift during the year, the IRS will require you to file a Form 709 U.S. Gift Tax Return. Each spouse will have to file their own return and mark that they are splitting gifts, if applicable. The information required to report the gift includes a description of the gift, the fair market value, your tax basis, and the identity of the recipient (including their Social Security number).

Giving Season

As you brainstorm some awesome gift ideas for your friends and family (If you have any ideas for a mom who has already bought everything Amazon has to offer, please let me know!), be aware that the IRS may want to know what you are giving this year.

At Creative Planning, we can help you with financial planning, charitable and family gifting, tax planning and preparation, and estate planning all under one roof. We deliver a team of credentialed, educated, experienced and action-oriented advisors, including CERTIFIED FINANCIAL PLANNER™ practitioners, certified public accountants, insurance specialists, attorneys and other professionals dedicated to helping you achieve your goals. If you have questions or would like help with any of these areas, please either reach out to your wealth manager or contact us.

Visit www.IRS.gov for more information about gift taxes.


  1. Frequently Asked Questions on Gift Taxes | Internal Revenue Service (irs.gov)
  2. https://www.taxpolicycenter.org/briefing-book/how-many-people-pay-estate-tax

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


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