Contrary to popular belief, not all gifts are tax-free. If you're in the position to dole out expensive gifts to family and friends, you have to be wary of potential tax implications.

This blog will go over the basics of gift tax, exclusions, and lifetime limits.

What is Gift Tax?

To put it simply: Gift tax is a federal tax on any transfer of money or assets while not getting anything in return. It's a way to prevent people from using "gifts" to evade tax responsibilities. Do you want to know what is 2022 gift tax rate? Visit this website.

The 2022 gift tax rate ranges between 18 and 40 percent. Typically, it's the giver who has to cover the taxes.

Annual Exclusions

Before you start worrying about your tax liabilities, take a breather! Most people don't owe gift taxes. Why? You have gift tax exclusions to thank for that!

Every year, you can take advantage of annual exclusions. The exclusion is a set threshold that triggers the 2022 gift tax rate. You won't owe gift taxes as long as you stay under that amount. For 2022, the annual exclusion is $16,000.

The great thing about the annual exclusion is that it applies to each recipient and per person. So, say that you file taxes with your spouse. That means you can give away a combined $32,000 a year. Not only that, but you can give $32,000 a year to multiple people. The exclusion isn't a sum of all the money you give away. It applies to each recipient.

That means a single person can give $16,000 to their mom, $16,000 to their brother, and $16,000 to their best friend without dealing with taxes.

Annual Exclusions

It gets even better. Even if you go beyond the annual exclusion, you have the lifetime exclusion to fall back on. The lifetime exclusion is like a well. Everything outside of that annual exclusion fills the well.

Let's say that you give your mother $20,000. The annual exclusion covers only $16,000 a year, so you would have to file IRS Form 709 to disclose the gift. The remaining $4,000 you gave above the threshold applies to the lifetime exclusion, so you still don't have to pay a gift tax.

What's the lifetime exclusion? For 2022, it's a staggering $12.06 million! That means you can disclose an additional $12.06 million in your life without having to pay a dime in gift taxes. But keep in mind that the lifetime exclusion whittles away and applies to your estate when you die. So the more of it you use now leaves less for your heirs to utilize when receiving your estate.

Understanding Gift Taxes

For most people, gift taxes aren't a huge concern. But if you're lucky enough to be extra generous, make sure to stay up to date on annual exclusion limits. If you go above them, disclose your gifts to avoid any trouble!

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