When it comes to planning for the distribution of your assets after your passing, gift taxes are important to keep in mind. Gift taxes apply to the transfer of property or assets from one person to another without receiving full compensation in return.
Grasping the basics of gift taxes can ensure that your estate plan goes into effect smoothly.
Gift tax exclusion
The gift tax exclusion is the amount of money or property you can give to another person without incurring a gift tax. As of 2023, the annual gift tax exclusion stands at $17,000 per person, meaning that any gifts below this value are not subject to taxation. However, if your gifts exceed this limit, you must report them to the relevant tax authorities.
Lifetime gift tax exemption
Apart from the annual exclusion, there is also a lifetime gift tax exemption. This is the total amount of taxable gifts you can give over your lifetime without owing gift taxes. It is a good idea to keep track of the gifts you give throughout your adult life, as you may be able to deduct these gifts from your lifetime exemption. Once you exceed the lifetime exemption, any additional gifts will be subject to gift taxes.
Unified gift and estate tax system
It is important to note that gift taxes are closely linked to estate taxes. Both fall under the unified gift and estate tax system, which means that the amount of taxable gifts you make during your lifetime can impact the total value of your estate that is subject to estate taxes upon your passing.
Gifts to spouses and charities
Transfers of assets between spouses are generally not subject to gift taxes. This means you can gift unlimited amounts to your spouse without triggering gift taxes. Additionally, donations to qualified charitable organizations are often excluded from gift taxation.
The IRS reports that of the 250,827 gift tax returns filed in 2021, only 1,813 were taxable returns. Though few sizable gifts are subject to taxation, it is important that you stay aware of the tax situation regarding your gift-giving so that you can remain fully informed during the estate planning process.