The Basics of Gift Taxes

Aside from receiving gifts, giving them to family and friends can also help you reduce your assets. There is a threshold, however, to how much you can give away in any given year, as well as over your lifetime.

Whether you’re giving or receiving a substantial gift, knowing the rules and strategies for avoiding a gift tax can help you navigate this aspect of your financial planning. In this article, we will explore the fundamentals of the gift tax and provide some tips on how to avoid it.

What is the Gift Tax?

The gift tax is a tax imposed by the government on transfers of assets or property during a person’s lifetime. The Internal Revenue Service (IRS) is responsible for keeping track of gifts taxpayers make and taxing them accordingly. The gift tax is intended to prevent individuals from avoiding estate taxes by giving away their assets before death. The gift tax usually only applies to the person making the gift (the donor) rather than the recipient (the donee). The donor is responsible for reporting and paying any applicable gift tax.

Gift Tax Exemptions and Exclusions

Fortunately, not all gifts are subject to a gift tax. There are exemptions and exclusions that can help you minimize or eliminate your gift tax liability. For instance, there is an annual gift tax exemption, which allows individuals to give a certain amount to other individuals tax-free. The 2023 annual gift tax exclusion amount is $17,000 per recipient. This means you can give up to $17,000 per individual to as many individuals as you like in 2023 without paying a gift tax.

In addition to the annual limit on individual gifts, there is a lifetime gift tax exemption that sets a threshold for the total amount of untaxed gifts an individual can make during their lifetime. As of 2023, the lifetime exemption is $12.92 million. Since this amount is subject to change, it’s important to verify the current figures and plan accordingly.

It should be noted that the lifetime gift tax exemption is unified with the estate tax exemption. This means that any portion of the lifetime exemption used for gifting reduces the available exemption for estate taxes. Therefore, an individual who uses a significant portion of their lifetime exemption for gifting may have less exemption remaining to shelter their estate from taxes upon their death.

Strategies to Avoid the Gift Tax

Though the gift tax guidelines can be complex, there are several strategies you can employ to minimize or avoid paying a gift tax:

Annual Exclusion Gifting: As mentioned earlier, you can give up to $17,000 per recipient annually without triggering the gift tax. By spreading your gifts across multiple individuals, such as family members and friends, you can make use of this annual exclusion and reduce your potential gift tax liability.
Payments for Support: Legal obligations to dependents, such as children, may be exempt from the gift tax. An example of this is a child’s college tuition.
Qualified Transfers: Payments made directly to a qualified medical care provider or academic institution on behalf of a donee are exempt from the gift tax.
Charitable Donations: Gifts made to qualifying charitable organizations are generally exempt from the gift tax. By donating to charities, you can support causes you care about while potentially reducing your estate tax liability.
Trusts: Using trusts, such as an irrevocable life insurance trust or a charitable remainder trust, can be an effective way to transfer assets while minimizing gift tax consequences. Trusts offer various tax planning opportunities, so you should consult with an estate planning attorney to determine the best trust, or trusts, for your needs.

Navigating Gifting and the Gift Tax

It’s important to remember that tax laws are subject to change. You should consult with qualified legal and tax professionals to ensure you comply with current tax laws. Contact our office today to talk with one of our experienced attorneys about developing a comprehensive estate plan and gifting strategy tailored to your specific situation.

This article offers a summary of aspects of estate planning. It is not legal advice. It does not create an attorney-client relationship. For legal advice, please contact our Wichita office at 316-830-5603.