Annual and Lifetime Gifts for 2023 and Beyond

With the holiday giving season and year-end quickly approaching, many clients are planning their gifting strategies for 2023. For those families with larger estates, it is not too early to talk with your trusted advisors to develop a plan to take advantage of the larger current lifetime gift tax exemption scheduled to sunset at the end of 2025.

There are many tax-efficient strategies to consider for reducing your current income and capital gains taxes as well as your potential estate, gift, and generation-skipping transfer (GST) taxes. In addition to saving on taxes, the gifts made now may improve the lives of your heirs, benefit charities and allow the gifted assets to appreciate outside of your estate. The following are a few very common strategies used to make gifts in the most appropriate and tax advantageous manner.

Annual Gifts: The federal gift tax annual exclusion allows individuals to gift a certain amount annually without incurring a gift tax. For 2023, the annual exclusion is $17,000 for individuals or $34,000 for a married couple. In 2024, this amount will increase to $18,000 for individuals or $36,000 for married couples. Making regular annual gifts can add up over time providing a significant amount of wealth to be transferred free of gift tax to future generations. As an example, a married couple with two married children and four grandchildren (8 family members) could give $272,000 (8 x $34,000) in 2023 and another $288,000 (8 x $36,000) in 2024 without incurring gift tax or using any portion of the lifetime gift tax exemption. The assets are transferred out of your estate and all appreciation thereafter will avoid a gift tax, currently a rate of 40%.

Gifting Highly Appreciated Assets: Donating appreciated assets to a charity is a tax-efficient way of gifting. You may receive a charitable deduction based on the fair market value of the asset on the date of the gift and will avoid paying capital gains on the appreciation. The charity receives the full value of the asset and is not required to pay capital gains tax when the asset is sold. There are specific rules and varying deductibility limits depending on the type of charitable organization receiving the gift. It is important to coordinate with your tax or trusted advisors before making the gift.

Qualified Charitable Distributions (QCD): Anyone over age 70½ required to take a Required Minimum Distribution (RMD) from an Individual Retirement Account (IRA) is eligible to make a QCD up to $100,000 to any qualified charity. A QCD cannot be gifted to a donor advised fund or private foundation. The RMD is reported as earned income on your income tax. By making a QCD, the qualified assets go directly to the charity and are not reported as taxable income on your income tax return.

Direct Payments to Medical and Educational Organizations: Qualified transfers, as defined by Section 2503(e) of the Internal Revenue Code, made directly for medical care or payments made directly to an educational organization on behalf of a person are not treated as taxable gifts. By making the payments directly to the providers, the annual and lifetime exemption amounts are preserved.

Take Advantage of the High Lifetime Exemption Amount: Currently at $12.96 million for an individual or $25.92 million for a married couple, in 2024 these amounts are estimated to increase to $13.61 million and $27.22 million, respectively. The 2017 Tax Cut and Jobs Act (TCJA) doubled an individual’s federal unified gift and estate tax exemption from $5.49 million to $11.18 million. This increase is only temporary and unless there is Congressional action, this exemption amount will sunset back to $5,000,000 (adjusted for inflation) in 2026. The estimate is the exemption will decrease to approximately $6.5 – $6.8 million. It is important to note no action is needed by Congress for this decrease to be implemented. If the lower exemption amounts begin in 2026, the federal estate tax revenues will start to increase again. With our significant national debt and increasing financial requests due to the foreign unrest in Ukraine and now Israel, Congress will likely be looking for additional revenue sources to meet our growing financial demands. Letting this regulation sunset may be a very simple way to increase tax revenues.

Finally, a note of caution for those with larger estates. The looming sunset date of December 31, 2025, may seem far away, but it is not too early to begin planning. There are likely enough attorneys to draft documents and properly process and report the lifetime gifts. However, the process for reporting these gifts requires a valuation of the fair market value. For cash, publicly traded assets, and other easy to value assets, the valuations process is straightforward. The challenge will be for those hard-to-value assets, such as closely held stock, real property, digital assets, gifts requiring discounted values, etc. The valuation process can be lengthy and there are far fewer firms specializing in preparing the valuations reports needed to accompany the Form 709 tax return (commonly known as the Gift Tax Return). This return must be filed no later than April 15th of the year after the gift is made. It is advisable not to wait until mid-2025 to begin working on a plan to take advantage of this large exemption.

Fortunately, a significant portion of your gifts will be exempt from gift tax and provide you with the opportunity to give assets tax-free. The amounts excluded from taxation change nearly every year, so it is important to revisit your plan annually. Your Greenleaf Trust client centric team stands ready to assist you in making your year-end gifts and beyond.