1) $17,000 Per Year: The federal tax law permits you to make an Annual Exclusion Gift Amount, i.e. the amount that may be gifted to any person without filing a Gift Tax Return. In 2023, it is $17,000 per recipient, and in 2024 it increases to $18,000 per recipient. Such gifts are called Annual Exclusion Amount Gifts (“AEA Gifts”) and you can make such gifts to as many persons as you wish each year, provided that you make only one such annual gift to each gift recipient. No Gift Tax Return is required for these gifts.
2) “Doubling Up”: If you and your wife are in a position to do so, together you can actually double that amount for each gift recipient. So, together, you could gift a total of $34,000 to each child in year 2023, without the need to file a Gift Tax Return or incur any gift tax.
3) “Year End Straddle”: If you act before the end of this current year (2023), you could each gift $17,000 to each child ($17K X 2 = $34,000). Then, on or after January 1, 2024, you and your wife could do the same thing once again, albeit at the higher rate of $18,000 per child, as you would then be in a different tax year. So, over the course of a period as short as a calendar week – provided that the week straddles both the last days of this year and the early days of next year — the two of you could, together, gift away a total of $70K ($34K in 2023), plus ($36K in 2024) without the need to file a Gift Tax Return or use any of your lifetime exemptions. I call this strategy the “Year-End Gift Straddle”.
Gifts Above the Annual Exclusion: Gift Tax Return Required
1) Lifetime Exemption: If you choose to make gifts above the Annual Exclusion Amount (“AEA”), then you can still make them gift tax free by using a portion of your Lifetime Exemption (aka, the “Unified Credit”). That Lifetime Exemption is currently $12.92 million per person for U.S. citizens in 2023, but increases to $13.61 million per person next year (2024). AEA gifts do not count against this exemption, and they can be made in addition to Lifetime Exemption gifts. Also, by making a timely election after the death of a spouse, the surviving spouse can opt to preserve the deceased spouse’s unused Lifetime Exemption for the survivor’s own later use, thereby effectively doubling it. This is called “portability” and would allow a married couple– beginning next year (2024) — to effectively give away $27.22 Million over their two lifetimes without incurring any gift or estate tax. Caution: This generous Lifetime Exemption is set to “sunset” (end) for those persons dying after 12/31/2025, and to then return to the prior much lower exemption, unless Congress extends the current exemptions contained in the Tax Cuts and Jobs Act of 2017. That prior, lower exemption would be only $5 million per person plus an inflation add-on.
2) Gift Tax Return: To the extent that your gifts exceed the Annual Exclusion Amount, you must file a Gift Tax Return. But no gift tax would be due so long as your cumulative gifts are less than the Lifetime Exemption. Reason for the Gift Tax Return: the IRS wants to track your use of your lifetime exemption, so that it knows how much you have left to use upon death. Example: if you used $1 million of your lifetime exemption to make gifts during your lifetime, then your remaining exemption to apply against estate taxes upon death would be $1 million less. Remember, though, that gifts within the AEA exclusion do not count against your Lifetime Exemption.
3) Rules May Be Different for Non-US Citizens: Note that the rules for persons who are not U.S. Citizens may be different. Consult your tax advisor if you are in this group.
Caution: Before making large gifts, be sure that you can afford to do so. If there is a possibility that either of you may need to apply for a Medi-Cal subsidy for Long Term Care in the near future, you should first consult an Elder Law Attorney or other professional with special knowledge about the Medi-Cal program, as such gifts – depending upon when and how they were made– may impair your eligibility for a Medi-Cal subsidy unless they were handled in a very special manner.