Should You Be Concerned About Gift Taxes?

We are fortunate to work with a generous group of clients and questions around gifting often come up often. These gifts could be money to help one of your kids with the down payment on a house, a new car for your spouse, or the donation of stock to a favorite charity.

Clients are often concerned about the potential tax impact of a gift and how this should factor into their giving strategy. In this post, we will go over the basics of gift taxation and some considerations that may impact how you give.

 

Gift Tax Basics

The IRS defines a gift as “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return”. This could include cash, investments, or real estate, for example.

Generally, every gift is a taxable gift. However, there are many exceptions and most gifts do not end up being taxed. Gifts that are excluded from gift taxes include:

  • Gifts that are under the annual exclusion for that calendar year ($18,000 per person in 2024).
  • Gifts to your spouse.
  • Gifts to qualifying charities.
  • Medical expenses or tuition you pay for someone else.
  • Gifts to a political organization.

The likelihood of most Americans actually paying gift taxes is low due to the lifetime gift/estate tax exemption limit. When gifts are made that exceed the annual exclusion limit per recipient ($18,000 in 2024), these count toward your lifetime gift tax exemption and your federal estate tax exemption. These taxes only kick in once this amount surpasses $13.61 million ($27.22 for married couples). One item to note is that in 2026, the lifetime exclusion amount will revert to its pre-2018 of about $5 million, adjusted for inflation, per person.

When there are gift taxes, they are typically paid by the donor.

 

Tax Reporting

If you make gifts above the $18,000 annual limit, you will need to file a gift tax return which keeps track of the gifts made that count toward the lifetime exclusion. Thus, unless you expect to exceed the lifetime exclusion, the decision of whether to gift more or less than $18,000 per year ($36,000 per couple) is more of a tax reporting issue than a tax bill issue.

 

Gifting Strategies

There are many more complex tax strategies around gifting that we won’t cover in this article, however, here are some high-level tax planning considerations:

  • Look for opportunities to make gifts that are not taxed such as paying for tuition.
  • Be aware of the lifetime gift exclusion as it may change over time.
  • If you are concerned about hitting the lifetime exclusion limit, considering gifting the annual exclusion amount each year and look into some of the more advanced gifting strategies.
  • Remember that for most, the $18,000 annual limit will be more of a tax reporting issue than a tax bill issue based on the current lifetime exclusion amount.

 

Takeaways

Gift tax planning can be a major issue for those with larger estates. However, due to the annual exclusion and lifetime gift exclusion limit, many Americans do not need to be too concerned about gift taxes. It is important to review your situation and see how this issue impacts your overall plan. If you would like to talk to a financial planner about your gifting strategy, please schedule a call with us here.

 

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

Advisory services offered through Financial Life Management, LLC – Doing Business As – SummitView Advisors, a Michigan registered investment adviser. The adviser may not transact business in states where it is not appropriately registered, excluded or exempted from registration. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment advisory services. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.