The Easiest Way to Avoid Tax is to Give Back

The IRS gift tax exclusion allows individuals to gift a certain amount each year without incurring federal gift tax. The annual exclusion changes periodically to keep up with inflation, and for 2024, the IRS has increased the gift tax exclusion, making it easier for people to transfer wealth to loved ones without extra tax implications. Here's a look at the latest updates and what they mean for you.

What Is the Gift Tax Exclusion?

The gift tax exclusion is the amount of money or property you can give to another person without triggering the federal gift tax. The IRS views gifts beyond a certain threshold as taxable events, which can require gift tax filing or, in some cases, reduce your lifetime gift tax exemption.

In 2024, the IRS has raised the annual exclusion to $18,000 per recipient. This is up from $17,000 in 2023, meaning you can now gift a bit more without hitting tax limits.

How the Gift Tax Exclusion Works

The annual exclusion amount is per person, per year. Here’s what that means in practice:

You can give $18,000 to as many people as you want. For example, if you have three children, you could give each one $18,000 in 2024 without any gift tax implications.

Married couples can “split” gifts and give a combined $36,000 to each recipient. This is called "gift splitting" and requires a special election on IRS Form 709.

No IRS reporting required if you stay under the limit. If you give an individual more than $18,000 in 2024, you'll need to file a gift tax return (Form 709), but you may not owe any tax unless you exceed your lifetime exemption.

Lifetime Gift and Estate Tax Exemption

Gifts above the annual exclusion reduce your lifetime gift and estate tax exemption, which is set at $13.92 million per person in 2024. Only once you exceed this lifetime threshold will gift tax be due, but filing requirements begin with any gifts over the annual exclusion.

The lifetime exemption is tied to the federal estate tax exemption, so if you don't use it for gifts during your lifetime, it will apply to your estate after you pass.

Why Use the Gift Tax Exclusion?

1. Transfer Wealth Efficiently: The gift tax exclusion is an efficient way to reduce the size of your taxable estate.

2. Benefit Loved Ones Now: Gifting allows you to share your wealth while you’re still alive, giving recipients immediate support.

3. Avoid Probate and Estate Complications: Gifts reduce the amount that may be subject to probate or estate tax.

Smart Gifting Strategies

Maximizing your annual gift tax exclusion can help with financial and estate planning. Here are some strategies to consider:

Gifting Directly to College or Medical Providers: Payments made directly to educational institutions or healthcare providers for tuition or medical expenses are also exempt and don’t count toward the $18,000 limit.

Setting Up 529 Plans for Family Members: Contributing to a 529 plan, which is a tax-advantaged savings plan for education, can be a tax-efficient way to help fund a child's or grandchild's education.

Gradual Wealth Transfer: Spreading out gifts over many years rather than gifting large amounts all at once helps maximize the benefit of the exclusion and minimizes the use of your lifetime exemption.

Closing Thoughts

The increased gift tax exclusion in 2024 provides a valuable opportunity for taxpayers to make tax-free gifts to loved ones. By taking advantage of this exclusion, you can help others while strategically managing your estate and potentially reducing future tax burdens.

Before making large gifts, consider consulting a tax advisor to ensure you’re taking full advantage of the current rules while aligning your gifting with your overall financial and estate planning goals.