In 2024, the gift tax exclusion amount has risen to $18,000, which is an increase from the $17,000 in 2023 and $16,000 in 2022. This means you can now give more of your money away without triggering extra taxes if your estate is large enough to be concerned about the estate tax threshold when you pass away.
It’s important to understand how taxes continue to play a role even after a lifetime of paying them. For instance, the Internal Revenue Code stipulates a gift tax on property or cash given to anyone if the value exceeds the annual gift tax exclusion. This exclusion amount has been rising by $1,000 increments annually since 2022, after increasing every two to five years prior.
If your estate exceeds the threshold of $13.61 million per individual in 2024, any amount over the annual exclusion will be taxed. It’s a tough pill to swallow, especially since you’ve already paid taxes on that money.
Consider this example: If you earn $200,000 a year, paying a 20% tax rate leaves you with $160,000. Saving 20% of this results in $32,000 annually. If you were to gift this entire amount, you’d face additional taxes on $14,000 of it if your estate exceeds the estate tax exemption.
It’s also vital not to confuse the estate tax exemption with the annual gift tax exclusion. The former is what you can pass on upon death without extra taxes, and it’s significantly higher than the gift tax exclusion, which is intended to reduce the taxable size of your estate annually.
If you don’t strategically gift this amount annually, your estate could end up paying a 40% tax on every dollar over the limit, potentially including state estate taxes as well.
The gift tax exists partly to prevent the accumulation of wealth that could lead to family dynasties that dominate because of their wealth rather than merit. Despite the controversy around such taxes, they play a role in regulating wealth distribution.
Strategically, if you are wealthy, you might consider setting up trusts or other financial mechanisms to pass on wealth to your heirs without a hefty tax burden.
When it comes to defining what counts as a gift under IRS rules, it includes anything transferred without full value in return. For example, selling a property below its market value can be considered a gift of the difference in value. This approach can be particularly useful if you’re looking to reduce the taxable value of your estate and help a family member with less financial means.
Similarly, when making large gifts, like helping a child with a down payment for a house, understanding the annual exclusion can save significant tax payments. For example, gifting $300,000 to your son for a down payment would mean the first $18,000 is tax-free under the exclusion, with the rest potentially taxable unless planned wisely over two tax years.
Education funding through 529 plans also utilizes the gift tax exclusion, allowing substantial sums to be gifted tax-efficiently for educational purposes.
In sum, while the tax laws are complex and ever-changing, understanding and utilizing the gift tax exclusion can help manage and reduce the tax implications for larger estates, ensuring your wealth does more good for your loved ones with less going to taxes. Always consult with a tax adviser to navigate these rules effectively.
