Maximizing Your Year-End Gifting Strategy

Maximizing Your Year-End Gifting Strategy

by Jon Fortin, J.D.

As the year swiftly comes to a close, many individuals are considering year-end tax plans, including gifting strategies. If you are not, you should. Making informed decisions about gifts can help mitigate your tax liability and maximize the benefits of your gifting plansβ€”whether they include gifts to nonprofits, family members, other entities, or individuals. Understanding the current laws, exemptions, exclusions, and filing requirements will help you successfully implement a gifting strategy to reduce the impact of taxes on your family wealth.


2023 Annual Gift Tax Exclusions

In 2023, a donor can exclude $17,000 of gifts made to each donee from total taxable gifts. If you are married, there's a way to double this exclusion. By filing a gift tax return and electing gift splitting, couples can effectively exclude $34,000 per donee from gift tax. For instance, if a donor gifts $34,000 to their son, files a gift tax return electing gift splitting, the entire $34,000 is excluded from gift tax under the annual exclusion.

It is important to note that the unused annual exclusion cannot be carried forward to the following year; it simply expires. Keep in mind, the 2024 annual gift tax exclusion will increase to $18,000. Using the annual gift tax exclusion is a valuable tax-saving strategy.


2023 Lifetime Exemption

In addition to the annual gift tax exclusion, individuals have a lifetime exemption that can shelter assets from gift and estate tax. You can use this exemption during your lifetime to exclude gifts from gift tax or utilize it at the time of your passing to shield assets from estate tax. The 2017 TCJA tax act significantly increased the lifetime exemption. In 2023, the gift and estate tax lifetime exemption is $12,920,000.

Unfortunately, the 2017 TCJA tax act is not permanent and will expire on December 31, 2025. At that time, the lifetime exemption will be reduced by roughly 50%. Therefore, it's wise to consider gifting strategies to fully utilize the increased exemption before the potential reduction on December 31, 2025.


Identifying the Appropriate Property to Gift

Choosing the right property to gift is a critical part of your gifting strategy. A gift of income-producing property not only removes the current value of the property from your estate but also shifts future income to a beneficiary who may be in a lower income tax bracket. Additionally, it removes the future appreciation of the property from your estate, further reducing potential estate tax liabilities.

Certain assets may qualify for valuation discounts allowing the donor to use less exemption to pass more assets.  Assets commonly subject to valuation discounts are non-controlling business interests and investments lacking marketability.

Donor’s should also consider the income tax consequences of gifting. If a donor gifts an asset which is at a loss, the donee will not be able to realize the loss if they sell the asset. The more tax-efficient strategy would be for the donor to sell the asset, claim the loss on their income tax return, and then gift the sale proceeds to the donee.


Gift planning is complex

Gifting can be a tax-efficient way to transfer your assets to family, friends, or charity while reducing your taxable estate. However, navigating the complexities of the gift tax rules requires careful consideration and planning. To ensure you make the most of the annual exclusion and lifetime exemptions, as well as properly structuring your gifts, it's highly advisable to consult with a tax advisor who can guide you through the intricacies of the tax code and help you make informed decisions.

As we approach the end of 2023, seize the opportunity to optimize your gifting strategy and take advantage of the current tax benefits, especially the generous lifetime exemption. By making well-informed decisions and consulting with experts, you can ensure your gifts have a positive impact on both your beneficiaries and your financial future.

If you have any questions or want to discuss your specific gifting strategy, you can reach out to a Redpath advisor here.

Jon Fortin, J.D.

Jon Fortin, J.D.

Jon Fortin is a partner and leads the Wealth Advisory Services practice area at Redpath and Company. He helps clients identify their specific wealth transfer goals and designs plans to effectively transfer their wealth while minimizing estate, gift, and income tax. Jon has provided individual tax services and wealth management planning since 1998 and joined Redpath and Company in 2020.