Understanding Gift Tax: Your Obligations and When it Applies

Written by Carson Hamill CIM®, CRPC®, Associate Portfolio Manager and Assistant Branch Manager & Dean Moro BComm, CIM®, Associate Portfolio Manager

The obligations for U.S. gift tax vary for U.S. persons and aliens and depends on factors such as the value of the gift, the relationship between the parties, and exemptions. It's important to be aware of gift tax rules and regulations to ensure compliance when giving or receiving significant gifts.

• Gift Tax Explained
• How to Prevent Gift Tax
• What Gifts Are Not Taxable
• How the Annual Gift Tax Exclusion Works
• Does the Annual Gift Tax Exclusion Affect Canadian Residents?

Gift Tax Explained

The U.S. federal gift tax applies to money or property transfers from U.S. individuals to other who receive no value, or less than full value in return. The gift giver is responsible for paying this tax, not the recipient.

To determine how much you can give without incurring tax on the gifted amount, two factors are considered:

• The annual gift tax limit and
• The lifetime gift tax limit

If your gift exceeds the annual gift tax exclusion, you are required to file a gift tax return with the IRS. The excess amount over and above the exclusion will be subtracted from your lifetime gift tax limit. Once you have used up your lifetime exclusion, any additional gifts may be subject to gift taxes.

The U.S. annual gift tax exclusion has increased to US$17,000 in 2023 from US$16,000 in 2022. The U.S. lifetime gift tax exemption for 2023 has increased to US$12.92 million. The exemption amount will revert back to US$5.04 million (adjusted for inflation) on January 1st, 2026.

If the sum of your gifts does not exceed US$17,000 per person per year, these gifts will not impact your lifetime exemption.

How To Prevent Gift Tax

By staying below the annual gift tax exclusion threshold of $17,000 (2023), you can generously give without having to file a gift tax return. However, exceeding the annual limit will require you to file.

What Gifts Are Not Taxable

The following gifts are excluded from the calculation:

• Qualified gifts that do not exceed the annual exclusion amount ($17,000 for 2023)
• Medical expenses
• Tuition expenses
• Gifts to spouses
• Gifts to political groups
• Gifts to charities

How the Annual Gift Tax Exclusion Works

The annual gift tax exclusion represents a predetermined amount that you can gift to an individual without the need to report it to the IRS through a gift tax return. For the calendar year 2023, you can gift up to US$17,000 to someone without IRS required.  Failure to file a gift tax return by the deadline is subject to a maximum penalty of 25 percent of the gift tax value.

Here's are more details about the annual exclusion:

• The annual exclusion applies individually to each recipient, and it is not a combined total of all your gifts to all persons. This means that, for instance, in 2023, you can gift $17,000 to your cousin, another US$17,000 to a friend, an additional $17,000 to a neighbor, and so on, without the need to file a gift tax return in 2024.
• For married couples, both spouses can individually gift US$17,000 each in 2023.
• Gifts between spouses do not require a gift tax return. However, in cases where the spouse is not a U.S. citizen, specific rules may apply. Please speak to your cross-border tax advisor for further details.
• Gifts made to qualified nonprofits are recognized as charitable donations rather than simple gifts.
• The recipient of the gift generally does not need to report the gift.

Does the Annual Gift Tax Exclusion Affect Canadian Residents?

In addition to U.S. residents, U.S. gift tax will also apply to U.S. citizens and green-card holders residing in Canada, regardless of where the gifted property is located.

Canadians who gift real and tangible property located in the United States, will also be affected by U.S. gift tax. This includes Canadian snowbirds with U.S. vacation properties.

Next Steps

If you’re planning on moving to Canada and need assistance with your investments, estate planning, and portfolio management, please call or email us at Snowbirds Wealth Management as we specialize in cross-border financial planning and wealth management. We work closely with experienced cross-border lawyers and accountants to ensure you have a team behind you.

About Snowbirds Wealth Management

Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focused on the cross-border market. Together with Dean Moro and Carson Hamill, associate portfolio managers with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders.

To schedule an introductory call, please click here.

Statistics and factual data and other information are from sources RJLU believes to be reliable, but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities nor is it meant to replace legal, accounting, taxation or other professional advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The information is furnished on the basis and understanding that RJLU is to be under no liability whatsoever in respect thereof.