From helping a child with a down payment on their first home, to jumpstarting family member’s 529 plan, to implementing estate planning strategies – the topic of gifting is one we discuss with our clients often. As we enter the season of giving and gifting, we aim to answer commonly asked questions and demystify some of the nuances associated with gifting rules.
- Question: How much can I gift each year?
The short answer: As much as you want.
The longer and more prudent answer takes into account how much you should gift (i.e. how does it fit into your overall plan and coordinate with other planning goals) and what the tax impact may be.
You may be familiar with the phrase “annual gifting limit” or “annual gift tax exclusion”, which in 2023 is $17,000. This does not mean you aren’t allowed to gift more, however $17,000 is the maximum amount (per recipient) you may gift without needing to file a gift tax return or reducing your lifetime exemption. If you are married, your spouse can also gift $17,000 to the same recipient, totaling $34,000 per person in 2023 (there are a couple of nuances associated with gifting as a couple which may necessitate the filing of a gift tax return, so we encourage you to consult with your tax advisor).
- Question: What are the tax implications associated with making gifts?
Answer: You will not receive a tax deduction for gifts made to others. For the recipient, gifts are generally not considered income for federal tax purposes. You should consult with your tax preparer on any state tax implications. One important exception/nuance to point out: in addition to gifting cash, many individuals choose to gift appreciated stock “in kind”. The gift of the stock itself is generally not considered a taxable event, however the recipient will be responsible for any income earned while held or capital gains realized when sold. For clients with gifting intentions, this is a strategy we help evaluate to determine the gifting source from an optimized tax standpoint. Recipients may be in a much lower tax bracket or even the 0% capital gains bracket, making it potentially more advantageous to gift the stock in kind instead of selling securities, incurring a higher tax bill, and gifting the proceeds in cash.
If you give more than the annual gifting limit, you are typically required to file a federal gift tax return. This does not necessarily mean you will owe taxes on the value of the gifts, but you will need to start recording and deducting the amounts against your lifetime gift and estate tax exemption. That lifetime exemption is currently rather large – $12.92 million per person in 2023. The limit is currently scheduled to be reduced by approximately half beginning in 2026 at the expiration of the 2017 Tax Cuts and Jobs Act. The gift and estate tax rates begin to come into play once the lifetime exemption is exceeded, which is unlikely for many individuals. For individuals and families with large estates, our team will work with you to brainstorm strategies for making the most of your annual gift exclusion in the context of your planning goals. We also recommend working closely with your estate attorney to discuss your situation and to develop a plan.
- Question: Are there any exclusions from what’s considered to be a gift?
Answer: The IRS indicates that most any gift is considered a taxable gift (reportable on a gift tax return). However, they note a few exceptions. Generally speaking, the following items are not considered taxable gifts:
- Gifts that are less than the annual exclusion in a particular calendar year (as discussed)
- Tuition or medical expenses paid directly to an education or medical institution on someone else’s behalf
- Gifts to your spouse
- Gifts to a political organization
- Gifts to qualifying charities
Special “Superfunding” Provision for 529 Plans
Superfunding refers to the ability to make up to 5 years’ worth of contributions in a single year into a 529 plan without those funds counting against the lifetime gift tax exemption amount. Depending on your financial situation, this can be potentially advantageous from a couple of angles, including more time for compounding of investment earnings. This approach can also be helpful as an estate planning strategy.
*Individual state sponsored 529 plans may have maximum contribution limits imposed by the state, so be sure to research plan-specific provisions prior to contributing.
We enjoy talking with clients about their legacy/gifting intentions and developing a plan for implementation that ensures all goals – legacy planning, retirement spending, tax conscientiousness, and otherwise – are backed by a sound approach. We appreciate that each client’s situation is unique, and are always available to brainstorm and build a strategy that is tailored to you and your family’s needs.
Meghan (Carson) Muñoz, CFP®, CPA
Commentary: The opinions expressed are those of Alaska Wealth Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed.
Note: This material should not be construed as tax advice or legal advice. You should always consult with your tax professional with regard to specific tax questions and obligations, and with your attorney with regard to specific legal questions and obligations.
Adviser Disclosure: Alaska Wealth Advisors is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Alaska Wealth Advisors’ investment advisory services can be found in its Form ADV Part 2, which is available upon request.