No one wants to think about, never mind, plan for the inevitable, but if you don’t utilize gifting strategies available to you now, the IRS will get a larger portion of your estate in the future. Many gifting strategies involve charities; however, gifting to family members can also reduce or avoid taxes altogether and is an effective wealth transfer technique.
Here are a few approaches to consider if you plan on gifting to family members:
- Annual Exclusion Gifts – You can give up to $18,000 for 2024 to a family member (or any other person) free of the gift tax without any reporting or paperwork involved. If you are married, your spouse can give $18,000, doubling the tax free amount. These gifts are not added back to your taxable estate, and all future appreciation on them is excluded from your estate as well.
- Large Annual Exclusion Gifts – You can gift more than $18,000 per year ($36,000, if married) to a family member by filing IRS Form 709, the Gift Tax Return. However, gifts over $18,000 reduce the amount you can leave tax-free at death. The current estate tax exemption is $13.6 million. You will not owe any gift tax on gifts over $18,000, as long as you don’t use up your $13.6 million estate tax exemption. The amount exceeding $18,000 is added back to your taxable estate, although all future appreciation on them is excluded from your taxable estate.
- Pay College Tuition or Medical Bills Directly – These are the two exceptions to the annual gifting limit. The $18,000 limit does not apply if you pay medical expenses or college tuition directly to the provider. These gifts reduce your taxable estate.
- 529 College Savings Plans – In this accelerated gifting strategy, you can give up to five years’ worth of $18,000 annual exclusion gifts, up to $90,000, all at once into a 529 college savings plan. If you are married, you and your spouse can double that to $180,000. It is deducted from your taxable estate and you can have control over the assets until they are distributed. Tax free distributions may be made for tuition, fees or books. As a bonus to this strategy, many states allow income tax deductions for these types of contributions. Please consult your tax accountant for your state’s guidelines and limitations.
A little planning now utilizing these efficient gifting strategies can go a long way towards reducing your estate tax liability in the future.
If you would like more information on this topic, please contact Jamie Downey at jmdowney@downeycocpa.com or 800-849-6022.
