There is a lot of confusion about how the gift tax works. Essentially, if you gift money to another individual, you can give up to $17k (for 2023) as an individual or $34k (for 2023) as a married couple without needing to file a Gift Tax Return.
A Gift Tax Return is filed to inform the IRS of amounts of gifts that go toward your Estate Tax Exemption. The current federal Estate Tax Exemption is $12,060,000 (for 2023, and double that for a married couple). This means that upon your death, the first $12,060,000 of your wealth (income + assets) are not taxed. Anything above that is taxed at 40%.
Anytime you file a gift tax return, that REDUCES your exemption amount. So if you gift $100k in a single year to an individual, your new federal Estate Tax Exemption is $11,960,000.
Another thing to keep in mind - unless current tax law changes, the Estate Tax Exemption will sunset at the end of 2025 and go down to around $7,000,000 per individual (roughly half).
One easy strategy to implement now to reduce potential estate taxes is through gift-giving to children into a brokerage account under the gift tax threshold. For each child, a married couple can contribute $34k per year in this account, as long as they’d like, and start to help build wealth for the next generation.
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