The federal gift tax can be a factor if your estate is going to be exposed to the estate tax. It has been in place since 1932 to stop people from giving gifts to avoid the estate tax.
There are some things you should know about this tax when you are planning your estate, and we will share five key pieces of information in this post.
The gift tax will not impact most people.
You will probably be relieved to hear that it is very likely that the gift tax will not impact you and your family. The gift tax is unified with the estate tax, and there is a unified gift and estate tax exclusion that represents an amount that can be transferred tax-free.
In 2023, the exclusion is $12.92 million. This is a record high that was established when the Tax Cuts and Jobs Act was enacted at the end of 2017. The provision in this measure that impacted the estate tax exclusion is going to sunset at the end of 2025.
On January 1, 2026, the exclusion will go down to $5.49 million adjusted for inflation. When you think about the implications, you can see that you may want to divest assets before 2026 while the exclusion is still at this record-high level.
There is an additional annual gift tax exclusion.
Each year, you can give as much as $17,000 to an unlimited number of people tax-free without using any of your unified lifetime exclusion. There is no limit to the overall amount that can be given as long as a single individual does not receive more than $17,000.
You could give a tax-free gift to someone in a calendar year that is valued at more than this amount, but you would be using part of your multimillion-dollar exclusion to give the gift tax-free.
If you are married, you and your spouse could give as much as $34,000 tax-free to an unlimited number of people every year. The steady utilization of this exclusion can help you shave down the value of your estate if taxation is going to be a source of concern.
You can pay school tuition for others tax-free.
Another gift tax exclusion exists that provides the opportunity to pay school tuition for students without incurring any gift tax exposure. It is strictly applicable to tuition payments, so it does not extend to books, fees, school supplies, living expenses, etc.
However, you can use your $17,000 annual exclusion to provide more support. It should be noted that you are required to remit the payment to the school directly; you cannot give the money to the student with the idea that they will pay the tuition bills.
There is a medical exclusion as well.
The other exclusion that can be used to give gifts free of the gift tax is the medical exclusion. Let’s say that someone that you know incurs a very large medical expense, and it is not covered by insurance. You can pick up the tab, and you will not be required to pay a gift tax on the expenditure. This exclusion can also be used to pay health insurance premiums tax-free.
We can help you use the gift tax exclusions to gain estate tax efficiency.
There are steps you can take to mitigate the burden if your estate is going to be exposed to the federal estate tax. The use of the unified exclusion while it is still at the especially high level is one prong, and the utilization of the $17,000 annual exclusion can also be part of the plan.
We can gain an understanding of your situation and explain your options so you can make informed decisions. At the end of the process, you will emerge with a carefully constructed plan that preserves your legacy in the optimal manner.
If you are ready to get started, you can schedule a consultation at our Warren, NJ estate planning office if you call us at 908-222-8803. You can alternately use our contact form to send us a message, and if you reach out in this manner, you will receive a prompt response.
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