Under our nation’s federal tax regulations, it is the person making a gift (the donor) who is responsible for any federal gift tax that is due. The gift’s recipient (the donee) does not have to pay any income taxes on the value of the gift the donee receives.

The annual gift tax exclusion, the maximum amount a donor can give a donee in a single year without filing a federal gift tax return, increased to $16,000 a year in 2022. That means you can give up to $16,000 to any individual without having to pay any gift tax.

But making a gift over $16,000 does not necessarily mean you will have to pay any federal gift tax. That’s because, in addition to the annual gift tax exclusion, Americans can also make lifetime gifts of up to the federal estate tax exclusion.

The federal estate tax exclusion increased to $12,060,000 in 2022. If you make a gift during the year that exceeds $16,000, you can deduct the excess from your lifetime exclusion.

For example, suppose you give one of your children $20,000 this year, $4,000 more than the federal gift tax exclusion. Rather than paying gift tax on the amount that exceeds the gift tax exclusion, you would simply report the excess on a federal gift tax return. Doing so will reduce your lifetime estate tax exclusion by $4,000.

If Congress does not pass any additional legislation, the estate tax exclusion will be cut in half in January of 2026. But since most Americans will never amass $6,000,000 in wealth, the law makes it possible for Americans to transfer a lot of money during their lives without incurring any federal gift tax liability.

This article was originally published on February 16, 2018, and updated on January 28, 2022.

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