Pass on what you've earned while minimizing tax liability.
December is the season for gifts, and for high-net-worth individuals, that means considering the gift tax. The federal gift tax is levied by the IRS against individuals who exceed annual or lifetime limits on gifting. The tax implications can be significant; fortunately, there are also several techniques you can use to give substantial gifts without tax liability.
Before you make a substantial gift, talk to an experienced tax attorney about gift tax planning. We have the experience and insight needed to achieve your goals while protecting your hard-earned wealth.
What is a "gift" for gift tax purposes?
The IRS defines a gift as a transfer of money or property without full consideration in money's worth; that is, without significant compensation for the value of the property. Examples of gifts include cash, real estate, vehicles, securities, jewelry, and art. There are, however, some types of gifts excluded from gift tax liability, including:
- Money or property transferred to your spouse (unlimited if your spouse is a U.S. citizen; if not, limits apply).
- Educational expenses paid directly to an educational institution.
- Medical expenses paid directly to a healthcare provider.
- Donations to political campaigns and candidates.
Notably, intent is not part of the definition of a gift. That is, you can be liable for the gift tax even if you didn't intend the transfer of property to be a gift. In addition, apart from your spouse, your relationship to the recipient is irrelevant; a gift to a child or grandchild is just as taxable as a gift to a friend or acquaintance.
How does the gift tax work?
The gift tax only applies to gifts over certain limits. On an annual basis, the current IRS limits are $17,000 in 2023 and $18,000 in 2024. This limit is per recipient; that is, you could give up to $17,000 each to as many individuals as you wish in 2023 without incurring gift tax liability.
Any amount in excess of the annual limit, in addition to being taxed in that year, also counts toward the lifetime exclusion limit. In 2024, that limit is $13.61 million.
The gift tax rate varies depending on the amount gifted. The lowest rate is 18%, for the first $10,000 in taxable gifts. The highest is 40%, when the taxable amount is over $1 million.
Generally, the person giving the gift is responsible for paying the gift tax. However, the recipient can also elect to do so if it is advantageous.
Strategies to minimize the gift tax
There are several methods that you can use to reduce or eliminate gift tax liability. One is simply to structure the gift so that it is spread across multiple tax years, thereby keeping you below the limit in each individual year. Another, as mentioned above, is to pay directly for educational or medical expenses, which is not a "gift" for gift tax purposes.
If you are married, another available technique is "gift-splitting." For married couples who file jointly, the gift tax limits essentially double, so as a couple, you can give up to $34,000 in 2023 and $36,000 in 2024.
Finally, certain forms of trusts can help you avoid gift tax liability. The most common method is called a Crummey trust, a type of irrevocable trust that gives the beneficiary a certain period of time to withdraw the gift, such as 30 to 60 days after the transfer. Crummey trusts allow you to set additional limits as well, such as limiting the amount or frequency of withdrawals from the trust.
Plan your giving with a holistic tax strategy
As with all aspects of tax planning, questions about the gift tax are never just about the gift tax. When we advise our clients on how to handle the gift tax, we talk about their entire financial situation, goals, and concerns. There is no single best answer. Each family and each situation is different, and the right strategy for you depends on your unique needs.
If you're concerned about the gift tax or any other tax liabilities this holiday season, let's start the conversation about how we can help. Reach out to DeWitt PLLC today.