Annual Gift Exclusion: 3+ Ways to Thoughtfully Share Your Wealth

Are you looking to significantly support your family and loved ones financially in 2024 and beyond? Consider how the annual gift exclusion and these tax-efficient approaches can align with your wealth and gracious generosity.

Learning Objective

Giving a truly thoughtful gift, one that considers your loved one’s needs or interests, can be an absolute joy. A personalized gift that provides an experience, an opportunity, or even a capability is truly special.

You probably remember a gift, or experience you received that felt, well, special. A gift that brought you joy, excitement, or perhaps gave you time back in your life because it made a task easier.

Chances are your memorable gift wasn’t a thing. It wasn’t an object. It wasn’t tangible. You probably did something different. You might have spent time with someone you love in a unique setting. Experienced a family tradition when you reached a certain age. You made memories.  

So, when you apply those experiences to your own life today, you can think about ways to:

• create deeper connection with your family and loved ones.
• give your money meaning.
• align your wealth with your thoughtful, generous spirit.

If you’re considering ways to significantly support your family or loved ones financially in 2024, it’s worth considering tax-efficient approaches, like planning within the limits of the annual gift exclusion, that align with your values.

When you understand the basics of these tax-efficient approaches, you can then incorporate the details of your own life and make the puzzle pieces fit together.

What is the Gift Tax?

The Internal Revenue Service (IRS) levies a federal gift tax on the transfer of property from one individual to another while receiving nothing, or less than full value, in return. There is a donor who transfers the property. On the other side of this event, there is also gift recipient, or donee, who receives the transferred property.

Gifted property can take different forms. For example, you can gift cash, real estate, stocks, or any other asset. Additionally, the IRS states that you can make a gift when you give the use of or income from a property, without expecting to receive something of at least equal value in return.

If you’re considering gifting appreciated assets, you might want to reconsider transferring them via an inheritance. This could allow the recipient of the assets to receive a step-up in basis to the fair market value at the time of the original holder’s death. Gifting an appreciated an asset during your lifetime does not allow this to happen.

With this as background, when you are considering a gift in 2024, there are two primary components you will want to evaluate.

Annual Gift Exclusion

The annual gift exclusion is a provision that allows you to give a certain amount of money or property to someone each year without incurring any gift tax.

For tax year 2024, this annual gift exclusion is set at $18,000 per recipient. Specifically, the first $18,000 of ‘gifts of present interest’ to each donee during the calendar year is subtracted from total gifts in determining the amount of taxable gifts.

This means that you could give $18,000 to your child, another $18,000 to a friend, and so forth, all without the burden of gift tax reporting and taxes.

All the gifts you make to a donee/recipient during the calendar year are fully excluded under the annual exclusion if:

• they are all gifts of present interest, and
• they total $18,000 or less.

One example of this, assuming you made no other gifts in 2024, is the following:

• When you make two $9,000 contributions to your child’s 529 account. You’ve used the entire $18,000 annual gift exclusion.

What if you and your spouse jointly want to give more than $18,000? Gift splitting is an option.

Gift Splitting

Married couples can effectively double the annual gift exclusion by “splitting” gifts. This allows each spouse to contribute up to the annual exclusion amount to the same individual, effectively doubling the total amount gifted without triggering gift tax.

For example, in 2024, a married couple could jointly gift up to $36,000 to an individual without incurring gift tax.

Or, when you gift $25,000 in 2024 to your niece to jumpstart her general contracting business.

• If you individually gift this, then the first $18,000 fits within the annual gift exclusion. You would need to report the remaining $7,000 to the IRS. Your lifetime gift tax exemption, discussed below, is reduced by $7,000.

• If you elect to gift split this with your spouse, it fits within the joint gifting limits.

• In both cases this assumes you made no other gifts to your niece in 2024.

The table below shows the recent history of the annual gift exclusion amount available from 2011 through 2024 for:

• Individuals
• Spouses who elect gift splitting

Table: Annual Exclusion per Donee for Year of Gift

Lifetime Gift Tax Exemption

In addition to your annual gift exclusion, you also have a lifetime gift tax exemption. This allows you to gift a certain amount throughout your lifetime without incurring gift tax.

This is a cumulative dollar amount that you can give away over the course of your lifetime without owing any gift tax.

For 2024, that cumulative amount – the individual federal taxable estate threshold – is $13,610,000.

For the vast majority of taxpayers in the United States, this is a substantial amount of wealth. For married couples, estates of decedents survived by a spouse may elect to pass any of the decedent’s unused exemption to the surviving spouse. Meaning, married couples have a unified federal taxable estate threshold of $27,220,000 in 2024.

Any gifts that exceed the annual gift exclusion amount will count towards this lifetime exemption.

Your Generosity Meets Your Financial Plan: How Your Gifting Matters

Reduce Lifetime Estate Taxes. The federal government taxes estates above a certain threshold. By giving away assets while you’re alive, you can reduce the total value of your estate and potentially lower your estate tax liability. Taking advantage of the full gift tax exclusion allows you to shelter more assets from this tax.

By strategically combining your annual gift exclusion with your lifetime exemption, individuals, as well as married spouses, can transfer significant assets tax-free during their lifetime.

Minimize Potential Future Tax Rate Increases and/or Threshold decreases. The current gift tax exemption is historically high. For reference, it was $5,000,000 in 2011. Like most fiscal policies – and tax rates are a component of fiscal policy – things can and do change with the political environment.

Let’s explore several specific, tax-efficient ways you can generously share your wealth with loved ones.

Direct Payments

Direct Medical Payments

If a family member, friend, – or random person for that matter – has significant medical bills, individuals like you can make unlimited payments directly to medical providers on behalf of another individual without triggering gift tax.

These direct medical payments must be for medical expenses that would qualify for the medical expense deduction if paid by your loved one (i.e. the taxpayer).

By directly paying medical providers, you can effectively cover medical costs for your loved ones without using your annual gift exclusion or lifetime gift tax exemption.

For example: If your mother or father has $50,000 of eligible, deductible medical expenses that you directly pay off in 2024, the $18,000 annual gift exclusion does not apply.

Direct Payments to Educational Institutions

You can also directly pay an educational institution for the tuition costs for someone else, like a loved one. This only applies to college tuition. It cannot be done for room and board, or other related costs.

If you are a parent considering this direct pay approach, you’ll want to analyze how this could affect your child’s need-based aid calculation.

However, relatives and unrelated parties do not face this same need-based aid constraint.

As a reminder, if you follow this direct payment approach for either educational institutions or medical providers, you are not limited to just the annual gift exclusion amount.

For example: If you wanted to pay all, or a portion, of a niece’s or nephew’s college tuition in a given tax year.

529 College Savings Plan Contributions

While the annual gift exclusion allows you to give each recipient up to $18,000 per year without incurring a gift tax, 529 accounts provide you with additional gifting flexibility.

Specifically, if you want to gift more than the annual gift tax exclusion during a calendar year to a 529 account, there is an option to do the following:

• Elect to divide the total amount of the gift by 5.

• Treat the resulting quotient as the same, consistent annual gift for the next 5 years.

• Year 1 starts in the year you made the gift.

• Assumes no additional gifts are made during the 5-year period.

So, if you are considering a 529 account superfunding strategy, the maximum contribution can be up to $90,000 in 2024. This is an education funding and gifting strategy families should consider for young children or young relatives. While there are real drawbacks to this specific 529 funding strategy, the benefits include:

• Accelerated savings: By contributing a larger amount to your 529 account upfront, you can take advantage of potential investment growth over a longer time period. The sooner you start – when the kids are young – the longer your investments have time to compound.

• Tax Planning: Earnings in a 529 plan grow tax-free, and withdrawals for qualified education expenses are also tax-free. Coordinating with a qualified tax advisor can be an important layer to successfully planning and executing on your 529 strategy, too, and should not be overlooked.

• Estate planning coordination: 529 account superfunding can be part of an estate planning strategy to reduce your taxable estate while supporting a loved one’s education. Coordinating with a qualified estate attorney can be another worthwhile element of successfully planning and executing on your 529 strategy, too.

If you have a significant education funding goal and significant assets to contribute toward your goal, it’s worth learning how you can pair a 529 plan with a 5-year gifting approach.

If 529 accounts and education funding generally is something you’d like to explore, read more here. Superfunding is at the extreme end of education funding continuum.

Practical Considerations

When must a gift be completed?

The completion of a gift, for tax purposes, depends on the type of gift being given. Here’s a breakdown:

• General Rule: A gift is considered complete in the year it’s unconditionally delivered to the recipient (donee) or their authorized agent.

• Checks: For checks, the gift is generally complete when:
  • Hand-delivered: It’s physically given to someone authorized to accept donations (for charities).
  • Mailed: The date of mailing (assuming it clears the donor’s account in due course).

• Tangible Personal Property: Physical possession by the donee signifies completion.

Nuances to Consider

• Gifts with strings attached: If the gift comes with conditions the recipient/donee cannot meet, the gift might not be considered complete until those conditions are fulfilled.

• Gifts requiring further action: For instance, gifting stock that needs to be transferred electronically might be considered complete on the transfer date (by the donor) or when received in the donee’s account (depending on the donor’s choice).

When Completion Matters

• Tax implications: Knowing the completion date determines the tax year it applies to. This can be crucial for claiming gift tax exclusions or maximizing benefits.

• Year-end giving: If aiming to use the annual gift exclusion for a specific year, ensure the gift is completed by December 31st of that year.

The Next Step

Using your annual gift exclusion to help others can feel rewarding. Take the long-view and consider pairing your gift with financial education or a meaningful experience with the recipient. Younger, or less experienced recipients can benefit from the financial rocket fuel you’ve given them.

For younger recipients who have the benefit of time, show them the power of compounding.

Specifically, you could talk with them about how this meaningful gift allows them to save for a future savings priority; an emergency fund, contribute to their retirement account, or paying down student loans for example.

Help your loved one quantify how this gift allows them to shift spending to a savings priority.

Take it one step further. You could help them automate their savings. You could also provide accountability by gently checking in with them to see how they are progressing toward their savings goal, seeing if they have questions, and sharing your own experiences.

It’s important that you’ve planned your own financial future and funded it before embarking on these generous and tax-efficient approaches to helping your loved ones. It could mean that you adjust your retirement spending to incorporate one or several of these approaches during your lifetime. Make sure your retirement is secure, and that you’ve fully addressed your other savings priorities.

Giving others financial help can sometimes be challenging emotionally and psychologically, even logistically.

Good communication, genuine sincerity, and thoughtful planning can help overcome pride, doubts, and inaction.

Because topics like the annual gift exclusion, like so many others in financial planning, intersects with the world of tax, make sure you coordinate with a qualified tax professional.

As your financial planner in Saint Louis, we can help you plan for the future and enjoy the present moment.

When you know where you’re going financially – and your path centers on who and what are truly important to you in life – you can create incredible clarity about your spending, saving, and giving.

Clarity to confidently spend on things that matter. Clarity to avoid spending your hard-earned resources on things that aren’t aligned with what you want in life. Working with your financial planner in Saint Louis can provide you with the right mix of accountability, collaboration, and long-term thinking.

If you’re unsure about your next step, let’s talk.

Disclosure

This commentary is provided for educational and informational purposes only and should not be construed as investment, tax, or legal advice. The information contained herein has been obtained from sources deemed reliable but is not guaranteed and may become outdated or otherwise superseded without notice. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decision.