A common phrase we hear in our office from clients is, “How much can I gift without paying taxes?”. While the answer for most households is simple, there are a few nuances to be aware of.
In 2023, the annual gift exclusion amount is $17,000. This amount is adjusted for inflation annually, 2022 was $16,000, from 2018 – 2021 it was $15,000, and lower before then. Many are under the impression that if you gift dollars to someone over the annual exclusion amount, they will have to pay taxes to the IRS.
There are three key components to understand when it comes to potential gift taxes:
- Unlimited Spousal Gifts-
Spousal gifts are almost always tax-free and do not require any reporting.
- Gift Tax Reporting
For non-spouse gifts, if you remain under the annual exclusion and you do not provide more than $17,000 to any one person, you generally do not need to report that gift. Let’s use an example of a husband and wife who wishes to gift assets to their child and their child’s spouse to help them purchase a new home or help with a new business. The husband and wife could both gift $17,000 of their assets to their child and their spouse without going over the annual exclusion. That is a total gift of $68,000 that generally will not need to be reported!
Now consider if the couple wished to gift $100,000 to their child and spouse. That would be $32,000 over the $68,000 described above. In that case it would require filing IRS Form 709. But all Form 709 would do in this case is apply that $32,000 against the husband & wife’s lifetime exclusion. As long as you choose to use your lifetime exclusion amount, you do not owe any gift tax until you exhaust through your lifetime amount.
- The Lifetime Exclusion Amount
Under current law, the lifetime gift and estate tax exclusion is $12,920,000 per person. That means a married couple have a combined exclusion of $25,840,000. Throughout their lifetime they could gift $25.84M above and beyond their annual exclusion amount. Also consider that if one spouse predeceases the other the government allows something called ‘Portability’. Portability allows for the living spouse to use up any remaining exclusion from the deceased spouse before using up their own. For the vast majority of households, this is an insurmountable number.
While it is always important to keep your accountant in the loop for large monetary gifts, the majority of households can rest easy that their generosity will not be met with a surprise from Uncle Sam.
To learn more or to discuss your investment needs. Please reach out to us at 219-465-6924 or through the Contact Us page on our website.
Mark Rosinski, CFP®, CPA