Here Are Some Year-End Transfers to Consider
Giving during the holidays is customary for many, and this often includes monetary gifts to loved ones. However, many people are not aware of the implications of making such gifts. Lifetime gifting can affect your individual income taxes, your individual estate and gift taxes, and capital gains taxes potentially to be paid by the recipient of the gift.
Under current federal law, estate and gift taxes are linked, and in 2024, taxpayers are entitled to a cumulative $13.61 million ($27.22 million if married) exemption from estate and gift taxes for the value of assets passing during life and at death. In other words, to the extent that the amount given away during life plus the amount transferred at death exceeds $13.61 million, the excess is taxed, but if the total amount is less than $13,610,000, there is no tax liability. The exemption will increase to $13.99 million in 2025, but take note that unless Congress acts, it will revert to its pre-2018 amount on January 1, 2026, expected at approximately $7 million after it is indexed for inflation.
Current law allows you to make gifts of $18,000 ($36,000 if married) per individual in 2024 without those gifts being counted toward your $13.61 million exemption. These are called annual exclusion gifts and are not taxable to the donor or to the donee, although the earnings on a gift, if invested, are.
Therefore, if you believe you have or will have more to transfer than $13.61 million ($27.22 million if married) during your lifetime and/or at death, you may use annual gift tax exclusion giving to your advantage to reduce the total value of your estate. For gifts to individuals exceeding $18,000 in 2024, you will be required to file a gift tax return with the IRS. However, no tax will be due as a result of the filing. The purpose of filing the return is to record the amount transferred in excess of $18,000 ($36,000 if married). The excess is counted toward your current exemption.
Certain assets have appreciation potential, and giving these assets away now can be beneficial if your estate is likely to be taxable because it removes the future appreciation from your estate and transfers it to your heirs. If your estate is not likely to be subject to estate tax, the greater tax benefit to your heirs may be to hold the assets until death. If you make lifetime gifts of appreciated property, the recipient will take your basis for income tax purposes, and if they’re likely to sell the highly appreciated asset, they will incur a large capital gain. But if the appreciated property isn’t transferred until death, the recipient receives a “step-up” in basis to the fair market value of the property at your death, and the capital gains tax the beneficiaries would have to pay when they sell the asset would not be as high. Thus, if you have highly appreciated assets, you should consider whether making the lifetime gift of the property makes sense.
In addition to monetary gifts to family, many people also make charitable donations at year-end. These gifts, if made to qualifying charities, are not taxed. However, if you are required to file a gift tax return to report noncharitable gifts and you made gifts to charities during the same year, you must include all of your gifts to charities on the return.
Note also that individuals receiving certain public benefits or those seeking to apply for benefits such as long-term care Medicaid, gifts such as those described in this article are not advised without seeking advice of an elder law attorney.
Nothing contained in this publication should be considered as the rendering of legal advice to any person’s specific case but should be considered general information.