As 2024 draws to a close, it’s a great time to consider your financial and tax strategies. One smart approach is to make cash gifts before December 31, which can reduce your potential estate taxes while sharing generosity with loved ones. Current tax laws allow individuals to gift a specific amount each year without incurring gift taxes or filing a gift tax return. By leveraging this opportunity, you can reduce your taxable estate.
The annual gift tax exclusion, adjusted yearly for inflation, allows significant tax-free transfers. For 2024, the exclusion is $18,000 per recipient. For instance, if you have three children, you can gift $54,000 ($18,000 × 3) to them in total this year without triggering federal gift taxes or requiring a gift tax return. Should your annual gifts to a recipient exceed $18,000, the exclusion applies to the first $18,000, and only the excess becomes taxable.
Note: This discussion isn’t relevant to gifts made to a spouse because they’re gift-tax-free under separate marital deduction rules.
Marital gift splitting enhances giving power
If you’re married, gifts made during a year can be treated as split between the spouses, even if the cash or asset is given to an individual by only one of you. This allows up to $36,000 per recipient annually–$18,000 per spouse. For example, a couple with three married children could gift up to $216,000 ($36,000 × 6) to their children and their spouses without triggering gift taxes.
Gift splitting requires both spouses to consent and must be documented on gift tax returns if more than $18,000 is given by one spouse.
Understanding additional gift tax rules
Even gifts exceeding the annual exclusion may not result in taxes, thanks to the lifetime gift tax exemption, which is $13.61 million for 2024. However, using this exemption reduces the amount available for estate tax purposes later.
Additionally, for a gift to qualify for the annual exclusion, it must meet the “present interest” rule, meaning the recipient must be able to immediately use and enjoy the gift. Have questions about year-end gifting or need assistance with a gift tax return? Contact your Smolin advisor to ensure your giving aligns with your financial goals.