Lock in Your Lifetime IRS Gift Tax Exemption to Pay Less Tax
Are you planning on giving a substantial amount of money to someone you love? Whether helping a loved one with paying for a home, depositing money into a college account, or gifting them property, you’ll want to watch out for the gift tax and be aware of a sizable Lifetime IRS Gift Tax Exemption that will change in 2025.
What is the gift tax?
The Gift Tax is a tax you may be required to pay when you give money to someone who is not your spouse or a dependent. The tax can be anywhere from 18% to 40% of the gift, and the responsibility to pay typically goes to the donor of the gift rather than the recipient. However, this does not exclude the recipient from paying capital gains if they sell the asset later on.
Gifts that qualify for the gift tax can include:
- Down-payment funds to adult children to help them purchase a home
- Funds deposited into 529 accounts
- Forgiving loans you have made to someone else
- Real estate or property to someone
Gifts that do not qualify for gift tax include:
- Gifts to spouses and dependents
- School tuition and education payments (paid to the institution, not the recipient)
- Medical expenses (paid to the institution, not the recipient)
- Charitable donations
- Medical Expenses
- Political Contributions
Exemptions to the Gift Tax
Many people who give sizable gifts qualify for one of two exemptions:
- Annual Gift Tax Exclusion – As of 2024, a person can give up to $18,000 each to as many people as they choose without paying tax. For married couples, both spouses can give $36,000 each, but this only applies if the couple files a joint tax return. Any more than this amount, and you are required to pay tax on the overage.
- Lifetime IRS Gift Tax Exemption – As of 2024, the IRS allows a person to give away $13.61 million in assets or property over the course of their lifetime and/or as part of their estate. If a gift exceeds the annual exclusion limit, the difference would then be deducted from this lifetime amount.
The takeaway is that most people will not have to pay gift tax until they exceed their lifetime limit. Just remember that if your gift exceeds the annual exclusion amount, you will need to file Form 709 to deduct the overage from your lifetime exemption and avoid paying gift tax. Complete this form when you make a gift, whether cash, property, or other assets, and file it with your tax return.
How do you lock in the Lifetime IRS Gift Tax Exemption?
One very important thing to remember is that after 2025, the amount of the lifetime limit is set to revert to the former $5.49 million lifetime limit per person, though the amount is subject to change, as it’s based on inflation and could be less in the future. Thus, if you have acquired enough wealth to surpass the annual limit and want to lock in the $13.61 lifetime limit, you might want to give your gift before this considerable change. If you do so, the value can grow over time in the recipient’s hands, free of gift or estate taxes. This is particularly useful for those who want to take advantage of a higher exemption and provide financial well-being for their loves ones right now. Additionally, doing so allows you to witness the joy of your gift during your lifetime.
Strategizing a Tax-Efficient Wealth Transfer Plan
When discussing wealth transfer, it is important to consider the financial implications that will come to those who receive your generosity. Considering the most tax-efficient methods should be at the forefront of these discussions in order to help maximize your gift and alleviate future stress. At Storen Financial, we present the full picture when navigating the details of wealth transfer, consistently emphasizing what plans will be the most beneficial for you as well as implementing a customized tax-saving strategy that fits your unique situation. Ultimately, our goal is for you to feel confident knowing you’ve worked toward setting your loved ones up for success. (Click here to learn more about strategizing a wealth transfer plan.)
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Want to learn more?
Here are more resources to help answer your questions…
Gift Tax, Explained: 2024 Exemptions and Rates – Smart Asset
The Estate Tax and Lifetime Giving – Charles Schwab
Form 709: What It Is and Who Must File It – Investopedia
Blog by Alex Kiritschenko, EA – Financial Advisor, Senior Tax Accountant
Learn more about Alex and the rest of the Storen Financial team here.