The annual gift tax exclusion is one of the most misunderstood financial concepts in the financial world. Changes in estate tax laws on both the federal and state level have only made gifting more difficult to understand. From how much you can gift in 2024 to whether a gift is considered taxable, we are going to clear up some of the misconceptions about gifting.
Despite recent changes to estate tax law, gifting remains an effective way for many taxpayers to transfer wealth. While some restrictions may apply, gifting generally allows the donor to remove assets from their estate before they pass away. This can be particularly powerful when it comes to assets that are expected to appreciate significantly over time or as a strategy to ensure that they remain below estate tax thresholds. In addition, gifting can also provide a mechanism to transfer assets to family members who might be in a lower tax bracket or for taxpayers that may prefer to gift during their lifetime because of the personal satisfaction gained by watching beneficiaries enjoy their gift today.
First, let’s review the basics. The annual gift exclusion has risen to $18,000 per person. Married couples have the ability to combine their gifts, also known as “gift splitting,” which would allow for up to $36,000 to be gifted to each recipient. Gift splitting requires a gift tax return to be filed to confirm that both spouses agreed to split the gift. Consider reviewing Form 709 for additional information. In addition to federal rules, you must also be cognizant of state rules that apply to gifting.
Taxpayers often incorrectly assume that they are only able to gift $18,000 per person per year without triggering taxes to the donor or the donee. This has become one of the most common misconceptions. Remember, it is possible to make additional gifts beyond to the $18,000 limit without triggering any taxes.
Keep in mind that federal gift tax is generally owed only when the cumulative gifts above the lifetime gift tax exemption are made. The good news is that in 2024, this amount is $13.61 million per person or $27.22 million per married. As a result, taxpayers with estates less than the thresholds noted may be able to gift the majority of their assets without ever subjecting themselves or the recipient with paying any gift taxes. For those with cumulative gifts greater than $13.61 for individuals or $27.22 million for married couples, gift taxes may apply and they are generally paid by the donor, not by the recipient. It may be possible to have the recipient pay any gift tax. Despite the additional flexibility, gifts in excess of the annual exclusion should only be made after consulting with a tax or estate planning attorney. Remember the applicable credit amount rules will sunset at the end of 2025, reducing the amount to a 2024 inflation adjusted amount of $6.4 million.
Interestingly, there are a few circumstances where gifts can be made in excess of $18,000 without counting against your lifetime gift exemption. These apply to gifts from one spouse to the other spouse, gifts to a qualified charitable organization, gifts made directly to a healthcare provider for medical reasons, and gifts made directly to an educational institution for a student’s tuition. (Directly is the keyword here.) When leveraged properly, these options can provide a great opportunity for excess gifts that are tax-free and will not impact your lifetime gift exemption.
Finally, there is a special election that can be made that pertains to education savings through a 529 plan. For 2024, you can give $90,000 ($180,000 for married couples at one time to a 529 plan by accelerating five years' worth of contributions as gifts. ($18,000 x 2 spouses = $36,000 x 5 years = $180,000). Utilizing this election can help parents and grandparents fund a large portion of education expenses in a tax-advantaged way.
Assets you may not want to gift
While gifting can be an effective estate planning strategy, it is important to be careful when gifting highly appreciated assets. Gifting generally transfers the cost basis from the owner to the recipient. This would result in the loss of the step up in cost basis at death. Passing an asset at death rather than gifting during your life can result in the step-up in cost basis rule applying which essentially extinguishes capital gains when assets are inherited. Keep in mind, this information is not intended to be a substitute for specific individualized tax advice. Since everyone’s situation is unique, consider speaking to your tax, legal and financial adviser to determine the most appropriate strategy for you.
Kurt J. Rossi, MBA, CFP®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.