With the end of the year approaching, some individuals will be thinking about how they can make a financial gift to a loved one during the holiday season. In many cases, financial gifts can be made at any point throughout the year without any estate or gift tax consequences, but once those gifts reach a certain value, there are some considerations to take into account.
What is gift tax?
In general (there are some exceptions), there’s a set amount that a person can gift to another individual each year without incurring gift or estate taxes. This year that amount is $17,000. Because this number is adjusted for inflation, next year it will increase to $18,000. As with all things in tax planning, it’s important to stay up to date on any changes if you plan on regularly gifting.
Don’t let the limit deter you, however – gifts over that amount may not always be subject to gift tax, but they are reportable by the donor to the IRS. These gifts are added up each year toward an individual’s lifetime federal gift and estate tax exclusion, which in 2023 is $12.92 million.
In which situations does gift tax apply?
In addition to cash gifts above that $17,000 amount, gift tax also applies to physical gifts such as a car or property, or any other type of gift valued above that limit. There are exceptions to every rule, but generally gift tax does not apply if you’re gifting money to your spouse, to a political organization, or directly to an educational institution to cover tuition expenses or to a medical provider to cover medical expenses for someone else.
Anything under these limits does not require a gift tax return to be filed, and will not be counted toward your lifetime limit. Married couples can also combine their gifts and together gift any one person up to $34,000 (in 2023) without paying the gift tax.
When it is applicable, gift tax is paid by the donor, not the recipient.
Making regular annual gift tax exclusion gifts is a simple way to reduce an estate from estate tax exposure and to see your loved ones enjoy these gifts during your lifetime.
As we approach the end of the year, it’s important to note that qualifying gifts must be completed by year end (i.e., checks need to be cashed in the year made). So, be sure to plan appropriately if you’re planning on making 2023 gifts.
Finally, barring legislative intervention, the lifetime gift tax exclusion amount is set to reduce significantly beginning in 2026, with some advisors estimating that it might be cut in half, between $6 and $7 million. For this reason, those with large estates should consider whether making substantial gifts before then makes sense for their circumstances in order to take advantage of today’s high exclusion amount.
If you need support in understanding how the annual gift tax exclusion may work in your estate plan, an estate planning attorney can help review your particular situation with you.