Posted On: SEPTEMBER 2024
It’s fair to say that federal gift and estate tax laws can be complex. However, ironically, one of the most effective techniques to reduce the size of your taxable estate is also the simplest: leveraging your annual gift tax exclusion.
And more good news: the exclusion amounthas increased for the third straight year. The IRS raised the exclusion amount for 2024 to $18,000, up from $17,000 per recipient in 2023. Prior to 2022, adjustments were more sporadic — often going several years before an increase.
By using the annual gifttax exclusion judiciously, you can transfer assets to your loved ones and reduce the size of your taxable estate without eroding yourfederal gift and estate tax exemption.
Annual exclusion in action
Generally, gift tax is due when you give cash or property to another person. However, you can use the annual gift exclusion to cover certain gifts made during the year.
For instance, if you have three adult children and seven grandchildren, you may give each one the maximum $18,000 in 2024 for atotal of $180,000. Then you can do the same the following four years. Assuming the exclusion amount remains at $18,000 perrecipient, you can pass atotal of $900,000 by using thistechnique. And, depending on the circumstances, you won’t have to file a gift tax return.
Furthermore, the annual gift exclusion is available to each taxpayer. If you’re married and your spouse consents to a “split gift,” the exclusion amount is effectively doubled to $36,000 per recipient (for 2024).
Specific rules for certain gifts
The rules are a little trickier if you’re gifting assets such as securities. Generally, the value of property for gift tax purposes is its fair market value. If you gift property that has appreciated in value, the recipient must use your basis (usually, the original cost) to compute the taxable gain if he or she subsequently sells the property. Nevertheless, the gain will be taxed to the recipient, who may be in a lower tax bracket than you. Thus, gifting can result in income tax savings for the family as well.
In addition, be aware that gifts made directly to an educational institution to pay for tuition or to a health care provider for medical expenses on behalf of someone else don’t count toward the gift tax exclusion. In fact, they aren’t even reportable gifts. You can pay tuition in excess of the annual exclusion amount of $18,000, and, in the absence of other gifts that may be reportable, you won’t have to file a gift tax return.
Finally, you have one other gift tax break in your hip pocket: the lifetime gift and estate tax exemption. This exemption applies to gifts of up to $10 million, indexed to $13.61 million in 2024, after you’ve exceeded the annual gift tax exclusion. But using any part of this exemption erodes the available tax shelter from estate tax, so you might decide to limit your lifetime giftgiving to amounts covered by the annual gift tax exclusion.
Talk to your advisor
Even though using the annual exclusion is a simple way of reducing your taxable estate, this isn’t to say you should abandon other more sophisticated estate planning techniques designed to maximize the benefits of your gift and estate tax exemption. Consult with usfor help in developing an overall gifting strategy that’s right for your circumstances.
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