In your later years or after you begin a family, you may want to make gifts of cash or other assets to family and friends. Depending on the size of the gifts, there may be tax-reporting requirements (or even gift/estate tax ramifications). Here are some general tips on gifting to loved ones (as distinct from charitable giving) that can help you manage or avoid tax reporting issues.
Gift Taxes vs. Gift Reporting
Many people are under the assumption that any gift over the annual gift tax exclusion is taxable. This is not true. In fact, the number of people who could possibly be subject to gift tax is vanishingly small. Here’s how it breaks down:
- The IRS currently allows you to gift any individual up to $18,000 per year (the annual gift tax exclusion) without incurring gift taxes or tax reporting requirements. This amount is adjusted over time for inflation (for 2025 it will be $19,000).
- If you gift any individual assets worth more than this in a single year, it does not necessarily mean you owe gift tax on the amount over the exclusion. It just means you need to fill out extra forms and track your gifts over time. So it could lead to more work preparing your taxes or slightly higher fees for your CPA or tax accountant to prepare them.
- A gift is only subject to gift tax when your gift value exceeds the annual exclusion amount AND you have already exhausted your lifetime gift tax exemption ($13.99 million next year for individuals, $27.98 million for couples). This is unlikely to be you! Even if recent tax changes sunset and the lifetime exemption drops back down to something close to $7 million for individuals, it will still most likely be larger than your lifetime gifts or final estate’s value.
Gifting Strategies to Avoid Gift Reporting
Luckily, there are many strategies to avoid gift reporting even on large gifts. Here are some of the most important ones that are most likely to be relevant to you:
- You can break up a gift between the recipient and their spouse to effectively double the annual exclusion amount (although, the assets gifted to the spouse will be their own).
- You can split up a large gift to the same recipient across multiple years keeping each annual amount below the exclusion.
- In lieu of cash, you can pay a medical bill or tuition bill, which is exempt from gift reporting regardless of size (but you have to pay the bills directly yourself with no middle man).
- You can make gifts directly to individuals, not through trusts that do not benefit from the annual exclusion amount.
Gifting to Minor Children
Parents and grandparents should be careful about gifting assets to minor children if there is any chance they’ll be eligible for financial aid later at college time. Contributions to 529 accounts are considered gifts subject to the rules above, but the assets are considered property of the custodian (usually the parent or grandparent) and treated more favorably by student aid formulas. With the right tax forms filed, parents can even “superfund” up to five years of combined contributions at once into these tax-advantageous accounts to let the money compound for longer.
That said, if your family is wealthy enough that financial aid is unlikely, this opens up various gifting strategies to children that can be tax-advantageous to the family as a whole.
A thorough discussion of gifting to children is beyond the scope of this article, but I have a couple of detailed handouts for parent and grandparent clients. Just let me know you’re interested!
Want to talk more about gifting strategies? Reach out to schedule a planning discussion!
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