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How to Make Tax-Free Gifts in 2023

rolled one hundred dollar bills tied with red ribbon

The IRS allows individuals to make tax-free gifts to certain recipients under specific circumstances. While you may not believe you are in the financial position to give tax-free gifts in 2022, what you learn may surprise you.

This post guides you on the IRS rules regarding making tax-free gifts and tips to take advantage of this tax benefit to save money on your taxes in 2022.

Annual Exclusion Tax-Free Gift

The IRS allows an annual exclusion that permits individuals to make gifts up to a certain amount to as many individuals as they want, without incurring any gift tax.

For 2022, the annual exclusion is $16,000 per recipient. This means you can give $16,000 to each of your children, grandchildren, friends, or any other individual without paying any gift tax. You can also make joint gifts with your spouse, allowing you to give up to $32,000 per recipient per year without incurring a gift tax.

Tuition and Medical Expenses Gift Exclusion

You can pay tuition or medical expenses for someone else directly to the educational institution or medical provider without incurring gift tax. While this is an incredible opportunity to save money, you should ensure that the payment is made directly to the institution or provider for the benefit of a specific individual.

You cannot gift the money to an individual with the sole purpose of using the money to pay for education or medical expenses. The money must go directly to the educational institution (like a college or university) or a medical provider.

Gifts to a Spouse Tax Exclusion

husband surprise his wife with gift of a new car

Gifts to your spouse are generally tax-free, regardless of the amount. However, if your spouse is not a United States citizen, the annual exclusion for gifts for your spouse is $164,000 in 2022.

This is certainly something to keep in mind around the holidays when expensive gifts are often purchased.

Gifts to Political Organizations Tax Exclusions

If you are involved in local, state, or federal politics, rest assured there is a tax-saving opportunity for you! The IRS allows you to make tax-free gifts to political organizations for use in political campaigns.

Like all gifts, ensure you retain all receipts in case of an audit.

Charitable Gifts Tax Exclusion

You may already be familiar with the charitable gift tax exclusion, as many people take advantage of this tax-saving tip. If this is the first time you’ve heard about charitable gift-giving, you should know that to get the gift-tax exclusion, you should make your gift to a qualified organization and ensure you obtain a receipt for the gift.

Gifts to a Trust Tax Exclusion

The IRS has specific tax allowances for trusts, including making tax-free gifts to a trust as long as certain requirements are met.

Among other things, to make tax-free gifts to a trust, the trust must be irrevocable, and you must not retain any control over the trust or the assets in the trust.

Gifts to Non-Profit Organizations Tax Exclusion

family donating gifts and toys to non profit organization

Similar to gifts made to charitable organizations, you are allowed to make tax-free gifts to a non-profit organization as long as the organization is registered as a 501(c)(3) organization by the IRS.

You can often determine the tax status of an organization by finding the information on its website or contacting them directly.

Gifts to a Tax-Exempt Organization Tax Exclusion

Like charitable and non-profit organizations, the IRS allows individuals to make tax-free gifts to a tax-exempt organization as long as the organization is recognized as tax-exempt by the IRS.

Common tax-exempt organizations include religious, scientific, and literary organizations.

Gifts to Governmental Agencies Tax Exclusion

While this gift-tax exemption may come as a surprise to some, the IRS allows you to make tax-free gifts to governmental agencies (including state or local governments) for public purposes.

Gifts to Reduce Estate Taxes

Finally, the IRS allows individuals to make tax-free gifts to reduce the value of their estate for tax purposes. The maximum amount you can gift without incurring any gift tax is the lifetime exemption amount.

For 2022, the lifetime exemption amount is $12.06 million for individuals and $24.12 million for couples.

It’s important to note that if you make gifts that exceed the annual exclusion amount or the lifetime exemption amount, you may have to pay gift tax. You may also have to file a gift tax return even if you do not owe any gif tax.

If you’re unsure if your gift qualifies for a gift tax exemption, reach out to Cook CPA Group today. We’ll help you consider the tax implications of gifts you make and answer any questions you may have.