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Plan now for year-end gifts with the gift tax annual exclusion

With the end of the year now on the horizon, it is time to put the finishing touches on tax planning for 2023.  One of the many important things to consider is the annual gift tax exclusion.  For 2023, the exclusion amount is set at $17,000.

This allows you to make gifts to family members and loved ones of cash or stock up to $17,000 without triggering any estate or gift tax.

The exclusion covers gifts you make to each recipient each year. Therefore, a taxpayer with three children can transfer a combined total of $51,000 to the children this year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there’s no need to file a federal gift tax return. If annual gifts exceed $17,000 per recipient, the exclusion covers the first $17,000 per recipient, and only the excess is taxable. For most taxpayers, these gifts in excess of $17,000 may result in no gift tax liability thanks to the lifetime unified credit (discussed below).

While the general rule is that any gift is a taxable gift, there are exceptions that are nontaxable and therefore do not count against your annual $17,000 exclusion. These exceptions include direct tuition payments or medical expenses that are paid on behalf of someone else, gifts to spouses, and gifts to qualifying charities.  For example, you can pay $20,000 to your grandson’s college for his tuition this year, plus still give him up to $17,000 as a gift.

Married taxpayers can split gifts

If you’re married, a gift made during a year can be treated as a split between you and your spouse, even if the cash or gift property is only given by one of you. This means that a married couple’s total exclusion per recipient per year is $34,000. Each spouse gets a $17,000 exclusion. For example, a married couple with three married children can transfer a total of $204,000 each year to their children and to the children’s spouses ($34,000 for each of the six recipients).

If gift-splitting is involved and a gift exceeds the exclusion, both spouses must consent to it on the gift tax return. The IRS prefers that both spouses indicate their consent on each return filed.  Additionally, if more than $17,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $34,000 exclusion covers total gifts.

“Unified” credit for taxable gifts

If a gift exceeds the exclusion, and is thus taxable, it does not necessarily mean that there will be tax due.  The unified tax credit covers the tax liability on the first taxable gifts that you make in your lifetime, up to $12.92 million for 2023. This unified tax credit is a lifetime limit, meaning it is not a “per recipient, per year” limit like the annual gift exclusion.  If you choose to use the unified tax credit against your taxable gifts, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.

In 2026 this lifetime limit is scheduled to be cut back from $12.92 million to about $7 million (unless Congress acts to extend it).  Making large tax-free gifts now may be one way to recognize and address this potential threat by reducing the taxable value of your estate. These gifts could help insulate you against any later reduction in the unified federal estate and gift tax exemption.

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