Breaking Down Gift Tax Exemptions

There are numerous misconceptions regarding the Gift "Tax."  This summary aims to provide a basic framework and dispel common myths surrounding lifetime gift-giving.

The Reporting Exclusion

There are two main "limits" related to gifts and are often confused because they are very similar.  First, is the "reporting" limit set by the IRS.  This means:

• If you give a gift to any one individual under a specific amount, which is a reporting limit, you don't have to report it to the IRS on a gift tax form.
• The limit applies to the person receiving the gift, which is $17,000 in 2023.  
• If you are married, the reporting limit applies to each spouse, so if you want to make a gift to one person and stay under the reporting limit, that person could receive $34,000 total - $17,000 from each spouse.
• If you give more than the reporting limit to an individual, you don't have to pay any tax immediately. You report the excess amount to the IRS.

The Estate Tax Exemption

Many people are fine giving gifts over the reporting limit and filing a form with the IRS to disclose the amount:

• In 2023, every taxpayer is given a lifetime exemption amount of $12.92 million for an individual or $25.84 million for a married couple in 2023.  
• Any gifts over the reporting limit are reported to the IRS and reduce your lifetime exemption.  That means, for 2023, the portion of your gift over the $17,000 reporting limit has to be reported to the IRS and will be deducted, like a "debit", from your lifetime exemption when you pass away.
• In its simplest terms, the lifetime exemption represents the total amount that can be excluded from federal estate taxes when you pass away - the assets when you die, and your lifetime gifts.

How Does this Work?

As an example, A wants to give $40,000.00 to B this year.  A would not need to report the first $17,000 but would file a form with the IRS reporting the remaining $23,000.  The IRS would note that the $23,000 is applied against A's lifetime exemption.

Why are People Concerned Now?

Importantly, although the lifetime exemption is relatively high now, it will adjust in 2026 and will return to about $6.8 million, adjusted for inflation.

What Does This Mean for Gifting?

Some individuals who may be subject to the estate tax are taking advantage of the high exemption amount now to make gifts through irrevocable trusts and other vehicles to their family members.  Married couples can also take advantage of other strategies, including portability and the unlimited spousal exemption in a comprehensive strategy to reduce the tax that their estate will have to pay when they pass away.

Beyond Taxes

Beyond the tax implications, there are plenty of other reasons to make lifetime gifts.   Many people chose to make gifts simply to watch their loved ones benefit and thrive from the gifts they have made during their lifetime.  Gifts can become a profound expression of love and support, underpinning pivotal moments in the recipient's life, such as a college education, buying a first house, or starting a business.

Importantly, making lifetime gifts can also stimulate open conversations about money and inheritance within families, helping to prepare the younger generations for future financial responsibilities.

Important Note

You should carefully consider a gifting strategy with a tax professional and an attorney. There are many considerations involved with gifting from both a tax perspective and a legal perspective, which should be considered on an individual basis.  For non-U.S. citizens, special considerations need to be taken into account when crafting gifting strategies, as they can be subject to different tax laws and regulations which will significantly impact the tax implications of their gifts.

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