How Much Can You Gift Tax Free?
The holidays are upon us, and with them comes the season of giving. But before you start writing those checks, it’s important to understand the gift tax rules.
What Is The Gift Tax?
The gift tax is a federal tax imposed on the transfer of property from one person to another without receiving anything in return. A gift could include cash, stocks, real estate, and other forms of property. The tax is the responsibility of the giver, with the highest tax rate for gifts exceeding the exemption amount set at 40%.
Annual Gift Tax Exclusion
In 2023, you can give up to $17,000 to each person without owing any gift tax. This means that you and your spouse can give up to $34,000 to each of your children without any tax consequences. This is known as the annual exclusion. Any gifts above that amount must be reported to the IRS on Form 709.
Lifetime Gift Tax Exemption
Once you give more than the annual gift tax exclusion, you begin to eat into your lifetime gift tax exemption. This is the amount of money you can give away during your lifetime without owing any gift tax. The lifetime gift tax exemption is currently $12.92 million for 2023.
The one big caveat is the $12.92 million exception is only temporary and only applies to tax years up to 2025. Unless Congress opts to make any changes, the exemption will revert to the $5.49 million threshold (adjusted for inflation) after the year 2025.
Strategic Planning Opportunities
There are a number of planning opportunities available to help you minimize your gift tax liability. These include:
- Gifting Appreciated Assets: Your children can take advantage of the 0% long-term capital gains rate if their income is below $44,625 for the year. This can save you from paying 15% or 20% on long term capital gain taxes.
- Using Custodial or Trust Accounts: This allows you to maintain control of how the money is used and invested until your child reaches the age of majority. A trust allows you to have even more control past the age of majority.
- 529 Accounts: Gifting towards these accounts allow you to save for your child’s education tax-free.
- Direct Payments:.Payments made directly to medical and educational providers are not subject to the gift tax and avoid the annual/lifetime exclusions.
- Locking in the Higher Exemption. If you are married, you can combine your lifetime exemption with your spouse’s to get a total exemption of $25.84 million. This can be a great way to avoid paying 40% on your estate.
Integrating Gifting into Your Financial Plan
If you are thinking about making stock or cash gifts, PMG Wealth Management can help you create a giving strategy that is tailored to your specific goals and objectives.Contact us today with any questions, and let’s make your generosity a seamless part of your financial plan.
Disclaimers / Sources:
Gift Tax Explained from Investopedia
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.