By Randy Brunson
DULUTH, GA., Sept. 1, 2023 | Most of us experience taxes in three ways. Taxes on cash flow, such as on earned income, unearned income, and capital gains; taxes on real and personal property; and purchase taxes, such as sales and VAT taxes. Local and state jurisdictions have a variety of other taxes and user fees, depending on their perceived need, their various agendas, and what they think they can get away with.
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One other type of tax which impacts fewer taxpayers is the transfer tax. Transfer taxes can apply when assets are transferred from one person to another, typically a gift. A discussion of how that works is a book for a different day.
For a number of years, gifts made during life and at death have been governed by what’s called the “Unified Gift and Estate Tax Law”. This means that transfers deemed to be gifts are taxed under a unified schedule, regardless of whether those gifts were made during life, or made at death via will as part of the estate settlement process.
When we give gifts of money or property to others, other than a spouse or dependent, those gifts are taxed. This excise tax starts at 18 percent and goes to 40 percent on certain gift amounts. It is generally the donor who is responsible for paying the tax. However, most taxpayers will never pay gift taxes for two reasons. First, certain types of gifts are specifically exempt from gift taxes. Second is because of two key IRS provisions – the annual gift tax exclusion and the lifetime exemption.
What types of gifts are exempt from the gift tax scheme? School tuition and education payments. Charitable donations. Medical expenses. Political contributions. Gifts to spouses and dependents.
The annual Gift Tax Exemption is indexed for inflation. For 2023, an individual can give up to $17,000 to each of as many people as he/she wants with no gift tax implications. By way of example, let’s say Joe and Mary decide to celebrate their 40th anniversary by making gifts to their ten grandchildren. They could each give each grandchild $17,000 in 2023, for a total of $170,000 per donor or $340,000 for Joe and Mary together.
Continuing with Joe and Mary, let’s say they give $25,000 in 2023 to one of their grandchildren. Do they then pay excise taxes on the $8000 in excess gifts? They do not. The reason? In addition to the annual exemption, there is a per person lifetime exemption which in 2023 is $12.92 million. Since Joe and Mary play by the rules, they know the importance of tracking this $8,000 and reporting it on Form 709. They also realize that their lifetime exemption is now just $12,912,000 instead of $12,920,000.
Note that both annual and lifetime gift tax exemptions are indexed for inflation. Also note that the lifetime exemption sunsets at the end of 2025. Barring Congressional action, the lifetime exemption amount will drop by half beginning January 1, 2026. If you have questions or would like to visit more about gifting and how you can capitalize on gifting opportunities, reach out to us. We very much enjoy helping you help others while keeping your dollars out of the hands of the Internal Revenue Service.
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