As you focus on shopping for Christmas presents this month, don't forget to make the most out of your estate gift tax exemptions before December 31. These gifts can be made without having to file a gift tax return or use any of your gift and estate tax exemption.
Giving to loved ones during your lifetime is a great way to allow your loved ones to benefit from your gifts right away. It also allows you the chance to be able to see your gifts improve their lives. In addition, giving helps reduce your taxable estate, and the assets' future appreciation also avoids gift and estate taxes.
There are three types of gifts that can be made: (1) gifts up to $17,000, (2) direct payments to medical providers, and (3) educational gifts.
1. Gifts Up to $17,000
Federal law allows you to give to any number of people up to a certain amount in a single year without incurring a taxable gift. This is called an annual exclusion. The recipient typically owes no taxes on the gift and doesn't have to report the gift unless it comes from a foreign source.
The IRS regularly adjusts the amount the gift can be. In 2023, you can give another person up to $17,000 in a single year without incurring a taxable gift ($34,000 for spouses “splitting” gifts). If your gift exceeds the amount to any person during the year, you have to report it on a gift tax return (IRS Form 709) and you begin to eat into your lifetime gift and estate tax exemption.
The gift and estate tax exemption are linked, meaning that the use of one's gift tax exemption will reduce the amount one may leave at death estate-tax-free. Each donor (the person making the gift) has a separate lifetime exemption that can be used before any out-of-pocket gift tax is due.
2. Payment to a Medical Provider On Behalf of Someone Else
The direct payment of medical expenses for another person is another type of transfer that the IRS does not consider to be a taxable gift. This payment can be made in addition to an annual exclusion gift of up to $17,000.
In order for the payment to qualify for the medical exclusion, the payment must be made directly to the health care provider or company that provided the medical care, and the amount paid must not have been reimbursed by the individual's insurance company. Giving the money directly to the beneficiary (even for the purpose of paying the medical bill) or allowing the beneficiary to be reimbursed will disqualify the payment or reimbursed amount from the medical exclusion and may trigger a gift tax.
3. Payment that Qualifies for the Educational Exclusion
Another type of gift that can be made in addition to the annual exclusion amount of $17,000 is a gift on behalf of someone to an educational institution. Payments made directly to a school or educational institution (such as a tuition payment for college or private school) is not considered a gift for gift tax purposes. The gift must be given directly to the institution providing the education, and not the student, and the payment must be for tuition, and not other education-related expenses like books and room and board.
The law does allow all three of these exclusions to the gift tax to be utilized. Meaning, you can give your grandchild a $17,000 check in addition to paying the hospital for his emergency room visit and paying his college tuition.
Making these tax-free gifts is an effective way to provide financial assistance to your family members, as well as reduce your estate for estate tax purposes. If you have questions about estate planning, contact Harpeth Estate Law to set up a free consultation.
