As the holiday season approaches, many are making plans to gift something beyond what can be bought in a store, finding great joy in helping their loved ones through generous financial gifts.  Financial gifts may come in the form of college tuition, cash, stocks, or even a family vacation. Giving financial gifts can provide a sense of security and freedom to loved ones, but often brings up questions about what kind of tax burden these gifts may bring.  This concern often comes out of common misconceptions around gift tax rules, so let’s take a quick look at what those rules are, so the focus this holiday season can be on the joy of giving.

There is a lot of attention given to the annual gift exclusion which is simply a term for how much you can give without paying gift tax.  This focus on the annual gift exclusion is a bit overstated, as in reality, most Americans will never have to pay any gift tax.  Here’s why.  You will often hear that the annual gift limit is $17,000 per person (2023), meaning that each individual can gift up to $17,000 per gift recipient each year.  You will also be told that any gift over $17,000 is subject to federal gift tax.  This is where most people get nervous, and for good reason- no one wants to pay taxes for giving away money they already were taxed on.  While these numbers are accurate, they are somewhat misleading.  Yes, if you gift an individual more than $17,000, you will have to file a 709 gift tax return.  For over 99% of Americans, the inconvenience of filling out the form is where the impact will end.  Each American in 2023 has a $12.92 million lifetime gift tax exemption, and spouses get to share- putting a married couple’s lifetime gift tax exemption at $25.84 million.  What the 709-gift tax return form does is track gifts over your annual exemption, which will come off of your lifetime gift tax exemption.  So, unless you plan to give through gift or your estate, more than $12.92 million per person, the whole point is moot, and you are free to give as you are able.  For example, even if you gifted $3 million over the annual exclusion throughout your lifetime, your federal estate tax exemption would simply go down from $12.92 million to $9.92 million.   

While it seems complex, what it boils down to is this:  

• If you keep each individual gift to $17,000 or less, you file no 709-gift tax return, and nothing comes off of your $12.92-million-dollar lifetime exclusion limit.  
• Gifts that are over $17,000 per person- file a 709-gift tax return.  Funds gifted that exceed $17,000 will come off of your $12.92 million lifetime limit. 
• No matter what amount you give, the recipient will never have to pay taxes on their gift.  

Having a solid understanding of these conditions can help you focus on what is truly important – the joy your gift brings to those you love.  

Please contact us if you’d like to discuss a plan for you:

Yes Wealth Management:

651-426-5854.