What happens if a donor exceeds the annual exclusion limit for gifts?

When a donor exceeds the annual exclusion limit for gifts, the excess amount over the limit becomes subject to taxation. The annual exclusion limit is a specific dollar amount that the IRS allows an individual to give as a gift each year without incurring any gift tax. For 2023, this limit is $17,000 per recipient.

If a donor gifts an amount that exceeds this limit, only the amount above the threshold is taxable. The donor is required to report this excess on a gift tax return (Form 709), but this does not necessarily mean that a tax payment will be owed at that moment. Instead, it counts against the donor’s lifetime gift tax exemption, which allows them to give away a significant amount over their lifetime before actual tax is due.

In this case, depending on how much total gifting has occurred, the donor may still avoid tax liability if their cumulative gifts are below the lifetime exemption amount. This threshold is quite high (over $12 million as of 2023), allowing many donors to gift significant sums without facing immediate tax consequences.

The other options do not accurately represent the implications of exceeding the annual exclusion. No action would not fulfill the requirement of reporting the excess gifts. Suggesting that all gifts would be subject to tax