With the passing of the Tax Cuts and Jobs Act (TCJA) in 2017, many individuals are enjoying the changes to the federal gift and estate tax laws. Making large gifts now can be a strategic move for those looking to reduce their estates without worrying about federal taxes down the road. In this blog, we’ll provide a general overview of federal gift taxes, the basic exclusion amounts, and how the TCJA may impact your future transfers. With careful planning and understanding of current tax laws you can successfully transfer your assets in the future while taking advantage of any available exemptions now.
Gift Taxes, Generally
Gift taxes are levied on certain transferred assets. These assets include real property, investments, cash, and other tangible items given to another person or entity. According to the Internal Revenue Service (IRS), the federal gift tax is a tax on the transfer of property by one individual to another while receiving nothing (or less than full value) in return. Moreover, the gift tax applies whether or not the donor intends the transfer of property to be a gift.
Exceptions to Taxable Gifts
The general rule is that all gifts are taxable gifts. But, there are certain exceptions to the general rule, including:
- Gifts to your spouse;
- Gifts that are less than or equal to the annual exclusion (in 2023, the annual exclusion is $17,000 per donee – For example, Frank may give up to $17,000 to each of his 6 grandchildren in 2023);
- Gifts to a political organization for its use; and
- Payments of tuition or medical expenses for someone else.
What If a Gift Exceeds the Annual Exclusion?
To the extent an individual gives an amount to a donee that exceeds the annual exclusion amount, it does not necessarily trigger federal gift taxes. For example, Frank may decide to give one grandchild $50,000 in 2023. That is, his gift would exceed the annual exclusion amount by $33,000. Fortunately, each taxpayer also has a lifetime estate and gift tax exemption. A taxpayer may give away up to a certain amount of assets or property over the course of his or her lifetime and/or as a part of his or her estate. In 2023, the lifetime estate and gift tax exemption amount is $12,920,000.
So, in Frank’s case, to the extent he’s never used any of his lifetime gift tax exemption, he will: (1) not pay federal gift taxes on the $50,000 gift, and (2) his lifetime gift tax exemption amount will be reduced to $12,887,000. How does the IRS know? If a taxpayer gives a gift that is more than the annual exclusion, he or she will likely need to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
How the TCJA Affects Gift Taxes
The TCJA made significant changes to gift and estate taxes. Perhaps the most notable change was the drastic increase in the lifetime estate and gift tax exemption. The amount doubled from $5 million to $10 million (adjusted for inflation). In 2017, the exemption amount was $5,490,000; in 2018, the exemption amount increased to $11,180,000. Of note, however, is that the TCJA is set to sunset in 2025, and the lifetime exemption amount is expected to return to pre-2018 levels. Despite this expected future change, the IRS has emphasized that those taxpayers that take advantage of the higher gift tax exclusion amounts from 2018 to 2025 will not be “adversely impacted” when the exclusion amount is expected to drop in 2026.Accordingly, taxpayers can make larger gifts for the next few years without the later sting of a reduced lifetime exemption.
By understanding the basics of federal gift taxes, you can make sure your assets are transferred successfully in the future. With careful planning, you may also be able to reduce your federal tax burden now by taking advantage of available exemptions before the expiration of the Tax Cuts and Jobs Act. Working with knowledgeable financial and tax advisors is key to help you strategically achieve your financial and charitable goals.
Make an appointment for a free consultation to speak with the Provident Financial Planning team of Certified Financial Planner™ and CPA/JD tax experts, so we can advise you on how to implement a giving and/or legacy strategy that is tailored to you.
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In His Name,
Zachary J. Montgomery, JD, CPA, CFE
 See IRS, Making large gifts now won’t harm estates after 2025, available at: https://www.irs.gov/newsroom/treasury-irs-making-large-gifts-now-wont-harm-estates-after-2025.