Tax Planning, Charitable Giving

’Tis the Season… Part II: Family Gifting

December 18, 2023

By Andi McNamara, CFP®
Vice President, Director of Financial Planning
Washington Trust Wealth Management

With the holidays and year end approaching, ‘tis the season to focus on giving – and taxes! At a time of year when you may be considering cash gifts to family, it’s important to know the power of annual exclusion gifting, which allows you to transfer wealth to family while minimizing your tax burden.

Understand Gift Taxes

There are some common misconceptions around giving and receiving gifts and the taxes triggered by those gifts. First, a gift recipient does not pay federal tax on gifts (income tax or gift tax) and is not required to report gifts to the IRS (unless it comes from a foreign source).i

The tax system associated with gifts (the Unified Gift and Estate Taxii) is separate from the income tax system. For gifts over the annual exclusion amount, it is the gift giver, not the recipient, who “pays” gift tax, which is typically not applied until the calculation of the estate tax. (Again, keep in mind that states have their own tax exemption regulations separate from federal tax.)

Learn more about gift taxes and transferring wealth.

Know Your Annual Exclusion Limit

By staying within the annual exclusion limit, you can avoid filing a gift tax return (IRS Form 709), which reports taxable gifts that you make to others during your lifetime and counts against your lifetime federal gift tax exclusion.

In 2023, you may gift up to $17,000 a year ($34,000 for spouses "splitting" gifts) to any individual without filing a gift tax return.iii For example, a married couple could give $34,000 to each of their children and grandchildren (or anyone else, for that matter) each year without counting against their lifetime federal exemption. That lifetime exemption stands at $12.92 million per person in 2023, so most Americans will never have to pay a gift tax. (The Tax Cuts and Jobs Act of 2017 will expire on January 1, 2026, and the lifetime exclusion amount will revert back to the 2017 level, which, when adjusted for inflation, is estimated to be close to $6.4 million).iv

Keep in mind that states have their own tax exemption regulations separate from federal tax.

If you want to gift amounts over the annual exclusion limit, you will need to file a gift tax return and begin to use your lifetime gift and estate tax exemption.

Learn more about your annual and lifetime exemptions.

Break Up Gifts Between Years

If you’d like to gift an amount over the annual exclusion limit, consider breaking up the gift into two: one payment at the end of this year and another after January 1. This will allow you to avoid filing a Form 709 in both years. For example, a married couple may want to give a cash gift of $50,000 to a child or grandchild. By giving $34,000 before December 31 and the remaining $16,000 after January 1, they will not need to file a Form 709 in either year. That also leaves an additional $18,000 for the year to gift under the annual exclusion limit.

What Not to Gift

When choosing which assets to gift to your family during your life, remember that low basis stock is best for charitable giving. Qualified charities can sell your low basis or other capital asset without any tax liability, but your family cannot.

Be sure to read ’Tis the Season … for Tax-Efficient Gifting (Part I: Charitable Giving)

Washington Trust Wealth Management Can Help

Embracing the art of strategic annual exclusion gifting is a powerful tool for both seasoned investors and those new to wealth management. The wealth advisors at Washington Trust Wealth Management can work with you and your tax professionals to tailor your wealth strategies to your unique goals and circumstances and ensure compliance with tax laws.

Connect with a wealth advisor

No matter where you are in life, we can help. Get started with one of our experts today. Contact us at 800-582-1076 or submit an online form.

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