A Refresher on Gift Taxes

Zach Cox, CPA

Director of Financial Education

Last Updated
December 20, 2022
Senior man giving present to young woman on Christmas

Gifting Reminders for the Holiday Season

During this season of giving to others, you may be considering ways to financially support your loved ones. While giving to others is a noble goal, it’s important to be smart about how you share your assets. If you’re not careful, you could trigger significant federal gift taxes.

Following are some gift tax reminders to keep in mind.

Gift tax is not the same as estate tax.

  • Estate Tax – Estate taxes may apply when assets are passed to your loved ones upon your death. A 40% estate tax is applied to any assets greater than the current gift tax exclusion amount. For 2022, American taxpayers can exclude up to $12.06 million, $24.12 million for married couples filing jointly, in gifts over a lifetime. These amounts are set to rise to $12.92 and $25.84 million, respectively. However, that amount can change and has been as low as $600,000 within the last 20 years. In addition to federal estate tax, many states have their own thresholds that apply to gifted assets.

It’s important to note that the value of everything you own is included in your estate’s total value for tax purposes. For example, jewelry, artwork, real estate, stocks, bonds, etc.

  • Gift Tax – Gift taxes apply to the transfer of property from one individual to another when receiving nothing (or less than full value) in return. An individual can transfer assets valued up to $16,000 annually (set to increase to $17,000 in 2023), or $32,000 if married filing jointly ($34,000 in 2023), per recipient without incurring the gift tax.

As long as you don’t give more than this amount to a single individual in a single year, you don’t need to file a gift tax return and the gift is not counted toward your lifetime exclusion amount.

For example, let’s say you and your spouse wish to give assets to your son and daughter-in-law to put toward a down payment on a home. You can give up to $64,000 without incurring a gift tax ($16,000 from you to your son, $16,000 from you to your daughter-in-law, $16,000 from your spouse to your son and $16,000 from your spouse to your daughter-in-law). However, if you decide to give $33,000 directly to your son, you will need to file a gift tax return and the gift will reduce your available lifetime exclusion.

Similar to estate taxes, the annual gifting limit applies to the value of anything you give to another person, including giving shares of a closely held business, adding someone to a real estate deed or providing an interest-free loan.

Certain types of gifts are exempt from gift taxes.

There are several types of gifts that are exempt from gift taxes, including the following:

  • Assets transferred to a spouse (limits may apply for a spouse who is not a U.S. citizen)
  • Financial support to dependents
  • Donations to charitable organizations
  • Payments for certain educational expenses
  • Payments for medical expenses made directly to the provider
  • Gifts made to certain political organizations
  • Gifts of less than $16,000 per giver, per recipient (as noted above)

It may make sense to gift certain assets sooner rather than later.

If you expect to gift assets that are likely to appreciate in value, such as stocks or a closely held business, it may be wise to make that gift sooner rather than later. Gifted assets are valued at fair market price at the time they are given. Your beneficiary receives a cost basis at that fair market value. And, because the assets are not appreciating within your estate, you’re able to donate them with less impact on your lifetime giving exemption amount.

This can be a complicated transaction, however, so it’s always wise to seek the guidance of an experienced wealth manager before making a move.

Do you have questions about gift and estate taxes? Creative Planning is here for you. Our teams have experience navigating a wide range of tax and financial challenges, always with the goal of helping clients achieve their long-term goals. For help with your gifting strategy, or with any other financial matter, please schedule a call.

 

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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