Gifting

Gifting: As Simple as Writing a Check – and Perhaps More Useful than You Thought

The potential for sharp cuts in the gift and estate tax exclusions makes gifting now an idea worth revisiting.

Each year, any individual can gift to another person up to the exclusion limit – without gift tax consequences for the giver, who reduces their taxable estate, and without creating an income tax liability for the recipient.

People often think they have to establish some form of elaborate gifting process to take advantage of this law, but that is not the case. Financial gifting literally is as simple as writing a check.

For example, in 2024, Mom and Dad decide to gift $18,000 to each of their adult children. Each parent writes a check in that amount to each child, and the gift is completed.

Gifting is not limited to family members – you and your spouse can each give up to the current limit to whomever and to as many recipients as you wish.

Four things to remember:

  1. Gifting involves giving away cash or assets that you might need someday. Therefore, you will want to give only what you won’t require.
  2. You cannot carry forward one year’s gift tax exclusion to the next year. Whether or not you maxed out your gifting for 2023, you are limited to $18,000 in 2024.
  3. If you get carried away in 2024 and give to any individual more than $18,000 in cash or other assets (e.g., stocks, real estate, personal property, etc.), next year you must file a gift tax return in addition to your federal tax return. You will not have to pay a gift tax at that time, but you will need to file IRS Form 709.
  4. Gifts to individuals are different from gifts to, for example, your church or a charity. Gifts to qualified not-for-profit entities are treated not as gifts but as charitable donations. They are unlimited as to amount, and they offer an income tax deduction.

The IRS defines a “gift” as a “transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.” The IRS website includes “Frequently Asked Questions on Gift Taxes,” and you might find it useful.

An Urgency to Gifting?

In 2024, the amount an individual can gift during their lifetime without tax consequences is $13.61 million ($27.22 million for a couple).

If those numbers exceed the value of your estate, you might question the value of using gifts to reduce its value.

Here’s your answer: In 2026, the 2017 Tax Act expires, and the estate tax exemption is scheduled to be cut in half, to around $6.2 million per person.

As a consequence, while today the value of your estate may be comfortably below the taxable level, in just three years it may be uncomfortably above it. In case Congress does not remedy this situation, making gifts each year is a simple and relatively painless way to avoid estate taxation when you, or you and your spouse, pass away.

Stocks a Better Option?

Conveying publicly traded stock or any asset that you think will appreciate can be a more effective method of gifting than giving cash. The asset will appreciate outside of your estate, further reducing your estate tax burden.

Usually, gifting shares of stock to a child is a big advantage if the child is in a zero to low capital-gains tax rate. (Note: This assumes no kiddie tax issue.)

Remember that if Dad gives stock to his child, the child assumes Dad’s basis in the stock. If Dad bought the stock when it was trading at $1 per share and later gifted it at a $100 per share, then his child would receive his basis. When the child goes to sell the stock, they would pay a capital gains tax based on what Dad paid for the stock, not the value of the stock when they received it. This is contrary to what would happen if the child had received the stock as an inheritance.

As a planning tip, when the basis of the gift is greater than its fair market value, stocks or other property should not be used for gifting.

Help Is Here if Needed

If your gifting strategy consists solely of writing a check to one or more individuals this year for $18,000 or less, you should be able to proceed without professional guidance.

However, if your gifting involves non-cash assets or is part of a more complex strategy, we invite you to call us at 480-345-8845.

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