Gift Tax Exemption
If you want to give a gift to someone, you may need to pay a federal tax on that gift. The good news is that the gift tax is fairly uncommon, and there are several exemptions you can use to avoid it.
Many people believe gifts they receive from loved ones are taxable, but in reality, it’s usually the giver who owes a gift tax, not the recipient. A gift tax is a federal levy placed on transferring money or property to someone who does not receive equal value in return. Fortunately, thanks to several key IRS rules, most Americans will never pay a cent in gift taxes to Uncle Sam. One important rule is the annual gift exclusion, which allows individuals to gift up to $17,000 to as many recipients as they like each year without having to worry about being hit with a gift tax. If married, couples can “gift-split,” effectively doubling the exemption amount to $34,000 per recipient. Another valuable tool is the use of trusts, which can provide protection from future tax laws.
It’s important to note that the current gift and estate tax exemption amounts are set to expire on January 1, 2026, unless Congress takes action to keep them in place. As such, it’s important for individuals to work with their financial advisors to implement a comprehensive gifting strategy that takes advantage of these exemption opportunities while they’re still available.
The Annual Exclusion Limit and Lifetime Exemption
A gift tax is a Federal tax levied on any gift or combination of gifts from one person to another that exceeds the annual exclusion limit. This amount varies by year but is currently $17,000 per recipient. Certain types of gifts are exempt from gift tax. Gifts to charity and gifts for tuition or medical bills are generally exempt from the gift tax, and married couples can combine their exclusions to give larger gifts. However, taxes may be owed if you make any gifts in excess of the annual exclusion amount. Meeting with a qualified estate and gift tax planning professional can help you minimize your liability.
The annual gift tax exclusion is enough for most people to avoid paying a gift tax. However, it’s important to talk with a financial or estate planner about how large of a gift you can make in any given year. The advisor can also help you create an overall strategy for avoiding gift taxes and planning for the future, including how to protect assets from creditors.
In addition to the annual exclusion, each person has a lifetime exemption. You can apply this credit to any gift you make above the annual exclusion limit. If you do not use your lifetime exemption, it will be applied to your taxable estate upon your death. The annual and lifetime exemptions are designed to make sure that most people don’t have to pay any gift tax. However, it is still important to meet with a tax and estate planning professional because laws related to the gift tax can change over time.
How to Avoid Gift Tax in Real Estate?
If you’re planning to leave a significant sum of money or property to family and friends, consider meeting with an estate or wealth management professional to discuss your options. The advisor can provide advice about how to best manage your investment accounts and structure your transfers to avoid triggering the gift tax.
The advisor can also advise you on how to transfer real estate without incurring a gift tax. A common way to avoid this tax is to split the property into several pieces and distribute them over multiple years. This approach will spread the transaction out so it doesn’t exceed the annual exclusion limit. Another option is to buy a life insurance policy with the proceeds, allowing you to gift unlimited money to your beneficiaries. A tax lawyer can advise you on other strategies for avoiding the gift tax.
As the estate tax exemption remains at $12,920,000 for 2023, you may be interested in making gifts that will decrease your taxable wealth. The annual exclusion amount has increased from $16,000 per recipient in 2022 to $17,000 in 2023, which allows you to give away a significant amount of wealth without reducing your lifetime gift tax exemption. The higher exemption amount is especially beneficial if you have substantial assets you wish to transfer to your children or grandchildren over time.
It’s important to note that the current gift and estate tax exemption amounts are set to expire on January 1, 2026, unless Congress takes action to keep them in place. As such, it’s important for individuals to work with their financial advisors to implement a comprehensive gifting strategy that takes advantage of these exemption opportunities while they’re still available.
