Use the Annual Gift Tax Exclusion to The Max

With the holidays approaching, you might be considering making gifts of stock or cash to family members and other loved ones. By using the annual gift tax exclusion, those gifts — within generous limits — can reduce your taxable estate. Indeed, in 2023, the annual gift exclusion amount is $17,000 per recipient. (In 2024, the amount will increase to $18,000 per recipient.)

Annual gift tax exclusion in action

Despite a common misconception, federal gift tax applies to the giver of a gift, not to the recipient. The good news is that you can structure your gifts so that they’re — at least to a limited degree — sheltered from gift tax. You can do that by taking advantage of the annual gift tax exclusion and, if necessary, the unified gift and estate tax exemption for gifts valued above the exclusion amount.

Making annual exclusion gifts is an easy way to reduce your estate tax liability. For example, let’s say that you have four adult children and eight grandchildren. In this instance, you may give each family member up to $17,000 by year end, for a total of $204,000 ($17,000 x 12).

Furthermore, the annual gift tax exclusion is available to each taxpayer. So if you’re married and your spouse consents to a joint gift, also called a “split gift,” the exclusion amount is effectively doubled to $34,000 per recipient in 2023 ($36,000 in 2024).

Bear in mind that split gifts and large gifts trigger IRS reporting responsibilities. A gift tax return is required if you exceed the annual exclusion amount, or you give joint gifts with your spouse. Unfortunately, you can’t file a “joint” gift tax return. In other words, you and your spouse must file an individual gift tax return for the year in which you both make gifts.

Lifetime gift tax exemption

The lifetime gift tax exemption is part and parcel of the unified gift and estate tax exemption. It can shelter from tax gifts above the annual gift tax exclusion amount.

Under current law, the exemption effectively shelters $10 million from tax, indexed for inflation. In 2023, the inflation-adjusted amount is $12.92 million. In 2024, the amount will increase to $13.61 million. However, if you tap your lifetime gift tax exemption, it erodes the exemption amount available for your estate.

Tax-exempt gifts

Be aware that certain gifts are exempt from gift tax. These include gifts:

• From one spouse to the other,
• To a qualified charitable organization,
• Made directly to a healthcare provider for medical expenses, and
• Made directly to an educational institution for a student’s tuition.

For example, you might pay the tuition of a grandchild’s upcoming school year directly to the college. That gift won’t count against the annual gift tax exclusion.

The right strategy for you

The annual gift tax exclusion remains a powerful tool in your estate planning toolbox. Contact us for help developing a gifting strategy that works best for your specific situation.