Tax Free
As of January 2023, the annual gift tax exclusion amount has increased to $17,000. That is the amount you can gift to any one person each year free of any tax implications. For years the amount was set at $10,000, but since 2002 it has been slowly increasing.
Making annual exclusion gifts allows you to move money to family members and friends so that it is out of your taxable estate with no estate or gift tax consequences. If you make a gift in excess of $17,000, you will need to use up your lifetime exemption amount on the overage. The federal lifetime exemption amount is $12,920,000 as of 2023, but will be dropping to $5 million in 2026, adjusted for inflation. Given the changes ahead, it is a good time to start thinking about ways to increase the monies you can gift to the next generation free of taxes.
Here is what you need to know to take advantage of these tax-free transfers:
• You can gift $17,000 to any one person. If you have a family of 10 including children, grandchildren and in-laws, you can give them a total of $170,000.
• You can double that amount if you are married. Don’t forget that your spouse can also gift to the same people so if you are married and have the same 10 family members, you and your spouse can gift a total of $340,000.
• If you gifted in December, you can gift again anytime this year.
• Checks are better than cash apps like PayPal, Venmo or Zelle. If you use a cash app, the IRS may question the payment to ensure it is not taxable income. You don’t want to have to explain grandma’s relationship to her grandson to the IRS.
• Outright gifts to family members are always appreciated, but if the family members are young consider other vehicles for the gifts such as a custodial account. Depending on your state, these can be called UTMA (Uniform Transfer to Minors Act) or UGMA accounts (Uniform Gifts to Minors Act). A custodian (often another family member) is named to hold the account for the minor until she reaches the age designated under state law. That is typically age 18 or 21 depending on the state where the account is created, but some states allow the accounts to continue until age 25.
• If you do not want the beneficiary to access the monies at a young age through a custodial account or if the beneficiary is not experienced with handling money, you can gift the assets to an irrevocable trust. An irrevocable trust allows you to dictate the terms of when the money is distributed. Maybe the beneficiary doesn’t receive the assets until age 35 or 40, or only upon your death. Another option is to keep the monies in trust and let the trustee decide when to give out the cash. This is a good choice if you will be making yearly annual exclusion gifts as the monies will add up quickly.
• If education is your focus, you can transfer the monies to a 529 account. Plus, you have the added advantage of being able to front load five years’ worth of annual exemption payments. If you just had a new grandchild, you can gift $85,000 to a 529 plan this year. You will need to file a gift tax return to report this transaction and don’t forget you cannot make any further annual exclusion gifts to the minor for five years.
• Even though no tax is due, it may be required or advisable for you to file a gift tax return. Talk to your estate planning attorney or tax professional about the specifics of your gifting.