Annual Gift Tax Exclusion for 2023 and 2024

04 Dec 2023 Annual Gift Tax Exclusion for 2023 and 2024

The Annual Gift Tax Exclusion, also known as the annual gift tax limit, or gift tax exemption, empowers individuals to share financial blessings with family, friends, or loved ones through tax free gifts without incurring federal gift taxes. This exclusion serves as a protective shield for these gifts, offering savings in both time and money.

Federal gift tax rates, ranging from 18% to 40%, make avoiding the tax a significant money-saving strategy. Moreover, the convenience of bypassing the intricacies of a gift tax return translates to substantial time savings, helping to avoid potential gift tax liability . So, for those feeling generous, it’s essential to be mindful of the gift tax exclusion limit for 2023.

🎁 Key Takeaways: Annual Gift Tax Rate and Exclusions

• 2023 Gift Tax Exclusion: $17,000 per recipient ($34,000 for married couples).
• 2024 Gift Tax Exclusion: Increases to $18,000 per recipient.
• Lifetime Gift Tax Exemption: $12.92 million in 2023 ($25.84 million for married couples).
• No tax or return required if under annual limits.
• Gift splitting allows spouses to double contributions per recipient.
• Non-cash gifts must be valued at fair market value on the date of the gift.
• Important deadline: Maximize year-end gifting by giving in both December and early January.
• Estate planning alert: Exemption drops ~50% in 2026 due to expiring TCJA provisions.

Understanding the Federal Gift Tax Exemption

In essence, the federal gift tax applies to all property gifts made by an individual within a given year. Typically, paying this tax falls on the giver rather than the recipient, who may need to pay taxes if the giver neglects to settle the tax. The estate and gift tax exemption, along with the lifetime exclusion, is crucial for high-net-worth individuals to strategize their gifting and avoid potential taxes. Additionally, in the unfortunate event of the giver’s passing before addressing the tax, the estate becomes responsible for the payment, highlighting the importance for gift givers to plan accordingly.

The scope of the gift tax is broad, covering both direct and indirect gifts. It’s not limited to cash alone; real estate, personal property, and tangible and intangible assets fall within its purview. Whether deeding a plot of land, giving a car, forgiving a debt, assigning insurance policy benefits, or transferring stocks, these actions could trigger federal gift tax implications. Also, gifting of shares in a private, or family-owned business qualify. The amount subject to gift tax for non-cash gifts is the property’s “fair market value” on the gift date.

The Gift Tax Exclusion for 2023 and Gifting Large Sums

The tax-free gift limit, or gift tax exclusion, in 2023 is set at $17,000 (for 2024 it will be $18,000), a modest increase from the $16,000 limit in 2022. This means you can generously gift up to $17,000 to as many recipients as possible in 2023 without worrying about federal gift tax implications. If you’re married, the good news is that your spouse can also contribute $17,000 to the same individuals, doubling the potential impact to $34,000 per person in 2023, allowing you to file a joint gift tax return . Staying within this limit for each recipient also exempts you from filing a gift tax return for the year. If you exceed this limit, you will need to file a gift tax return to report the excess amount.

Mechanics of Gifting

When gifting cash, it is best to write a check to the recipient, and keep a copy of the cleared check, or the bank statement showing it as cleared, in your tax file. If both spouses are gifting to the same recipient(s), we recommend that each spouse write and sign a separate check, even if it is from the same joint bank account. This process, known as gift splitting, allows married couples to maximize their gift tax exclusions.

When gifting shares in a privately held business entity, we recommend that documents be prepared that describe the gift and that are signed by the one making the gift. An important consideration with gifting shares in a private entity is the value of the gift so that it does not exceed the annual gift exclusion amount. We can help prepare an estimate of the valuation and the paperwork to document the gift.

Beyond the Limit: Gift Tax Returns and Lifetime Gift Tax Limits

Should you exceed the $17,000 limit for any recipient in 2023, and no exemption applies, filing a federal gift tax return (IRS Form 709) becomes necessary, though lifetime gifts are protected by a considerable lifetime gift tax exclusion. However, surpassing the limit doesn’t automatically mean owing tax. With a considerable limit, a lifetime gift tax exclusion protects most individuals from paying any gift tax on large gift amounts.

A year-end strategy for those wishing to give more than the annual exclusion amount is to make the 2023 gift (maximum of $17,000) before the end of December, and then make the 2024 gift (maximum of $18,000) in early January.

For 2023, the lifetime gift tax limit stands at $12.92 million, a notable increase from the $12.06 million in 2022, adjusted annually for inflation, providing a substantial lifetime exemption. Married couples enjoy double this limit, aligning with annual and lifetime gift tax exemptions, as well as the federal estate considerations. Understanding these limits ensures that your generosity remains untethered by unnecessary tax burdens, allowing you to continue sharing the joy of giving. However, it is important to note that these limits will be cut by approximately 50% beginning January 1, 2026, unless congress passes new legislation. This is due to the 2017 Tax Cut and Jobs Act (TCJA) legislation where many of the tax cuts revert to 2017 levels beginning in January 2026.

Frequently Asked Questions About the Gift Tax Exclusion

What is the federal gift tax 2023 annual exclusion and for 2024?

In 2023, the limit is $17,000 per recipient. In 2024, it increases to $18,000. Married couples can double this amount through gift splitting.

Do I need to file a gift and estate tax return if I exceed the annual exclusion?

Yes. If you gift more than the annual limit to a single person, you must file IRS Form 709. However, you likely won’t owe tax unless you exceed your lifetime gift exemption.

What counts as a taxable gift?

Any transfer of cash or assets (like real estate, stocks, cars, or business shares) with no expectation of repayment may count as a gift. The value is based on fair market value at the time of transfer.

How can married couples maximize their gift tax exclusion?

Each spouse can gift up to the annual exclusion amount to the same person. Writing separate checks ensures proper documentation for the IRS.

Will the gift tax exemption change in the future?

Yes. Unless new legislation is passed, the lifetime gift and estate tax exemption is set to be cut in half starting January 1, 2026, due to the expiration of the Tax Cuts and Jobs Act provisions.

Understanding the Gift Tax Exclusion: A Smart Way to Give

The Annual Gift Tax Exclusion is a key financial planning tool in personal finance that lets individuals give up to a specified amount annually per recipient without triggering federal gift taxes. For 2023, that limit is $17,000 and increases to $18,000 in 2024. Married couples can gift double that per person using “gift splitting.” These exclusions help families transfer wealth tax-efficiently and avoid complex tax filings.

For high-net-worth individuals, staying informed about both annual and lifetime gift tax exemptions (currently $12.92 million per person) is essential—especially since these generous limits are expected to be cut in half starting in 2026 unless Congress acts. Whether you’re gifting cash, property, or shares in a private business, careful planning can help you give freely without tax consequences.

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