04 Dec 2023 Gift Tax Exclusion for 2023 and 2024
The Annual Gift Tax Exclusion, also known as the gift tax limit or gift tax exemption, empowers individuals to share financial blessings with family, friends, or loved ones without incurring federal gift taxes. This exclusion serves as a protective shield for these gifts, offering savings in both time and money.
Federal gift tax rates, ranging from 18% to 40%, make avoiding the tax a significant money-saving strategy. Moreover, the convenience of bypassing the intricacies of a gift tax return translates to substantial time savings. So, for those feeling generous, it’s essential to be mindful of the gift tax exclusion limit for 2023.
Understanding the Federal Gift Tax
In essence, the federal gift tax applies to all property gifts made by an individual within a given year. Typically, paying this tax falls on the giver rather than the recipient. However, if the giver neglects to settle the tax, the recipient may find themselves liable. Additionally, in the unfortunate event of the giver’s passing before addressing the tax, the estate becomes responsible for the payment.
The scope of the gift tax is broad, covering both direct and indirect gifts. It’s not limited to cash alone; real estate, personal property, and tangible and intangible assets fall within its purview. Whether deeding a plot of land, giving a car, forgiving a debt, assigning insurance policy benefits, or transferring stocks, these actions could trigger federal gift tax implications. Also, gifting of shares in a private, or family-owned business qualify. The amount subject to gift tax for non-cash gifts is the property’s “fair market value” on the gift date.
The Gift Tax Exclusion for 2023
The tax-free gift limit, or gift tax exclusion, in 2023 is set at $17,000 (for 2024 it will be $18,000), a modest increase from the $16,000 limit in 2022. This means you can generously gift up to $17,000 to as many recipients as possible in 2023 without worrying about federal gift tax implications. If you’re married, the good news is that your spouse can also contribute $17,000 to the same individuals, doubling the potential impact to $34,000 per person in 2023. Staying within this limit for each recipient also exempts you from filing a gift tax return for the year.
Mechanics of Gifting
When gifting cash, it is best to write a check to the recipient, and keep a copy of the cleared check, or the bank statement showing it as cleared, in your tax file. If both spouses are gifting to the same recipient(s), we recommend that each spouse write and sign a separate check, even if it is from the same joint bank account.
When gifting shares in a privately held business entity, we recommend that documents be prepared that describe the gift and that are signed by the one making the gift. An important consideration with gifting shares in a private entity is the value of the gift so that it does not exceed the annual gift exclusion amount. We can help prepare an estimate of the valuation and the paperwork to document the gift.
Beyond the Limit: Gift Tax Returns and Lifetime Limits
Should you exceed the $17,000 limit for any recipient in 2023, and no exemption applies, filing a federal gift tax return (IRS Form 709) becomes necessary. However, surpassing the limit doesn’t automatically mean owing tax. With a considerable limit, a lifetime gift tax exclusion protects most individuals from paying any gift tax.
A year-end strategy for those wishing to give more that the annual exclusion amount is to make the 2023 gift (maximum of $17,000) before the end of December, and then make the 2024 gift (maximum of $18,000) in early January.
For 2023, the lifetime gift tax limit stands at $12.92 million, a notable increase from the $12.06 million in 2022, adjusted annually for inflation. Married couples enjoy double this limit, aligning with annual and lifetime gift tax exemptions. Understanding these limits ensures that your generosity remains untethered by unnecessary tax burdens, allowing you to continue sharing the joy of giving. However, it is important to note that these limits will be cut by approximately 50% beginning January 1, 2026, unless congress passes new legislation. This is due to the 2017 Tax Cut and Jobs Act (TCJA) legislation where many of the tax cuts revert to 2017 levels beginning in January 2026.
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