The Tax Rules of Giving

By: Sarah Delano Pavlik

People frequently ask me how much they can give to someone at any one time.  The answer for most of us is any amount you want.

The federal government imposes a transfer tax on all American citizens and residents, but there is an exemption of $13,610,000 per person as of January 1, 2024.  This amount is increased each year based on inflation.  However, the law which increased the exemption is set to "sunset" on December 31, 2025.  At that time, if Congress and the President do not act, the exemption will be decreased by 50%, which is estimated to leave a $7,000,000 exemption in 2026.

Each of us can use this exemption amount to cover transfers during our lifetimes or at our deaths.  So, this year, I could give my children (or anyone else) up to $13,610,000 without incurring any gift tax (assuming I have not used any of my exemption in the past).  Or, if I died this year, my estate would not owe any estate tax if the value of my estate was less that $13,610,000.

There are certain exceptions to the transfer tax.  There is an unlimited marital deduction if your spouse is a U.S. citizen.  So, if Jeff Bezos ever marries Lauren Sanchez, at his death, he could leave all his billions to her tax-free.  Or he could give her any amount while he is alive.  Gifts to charitable organizations are also exempt from gift and estate tax.

There is also an exemption for gifts to individuals.  This amount is called the "annual gift tax exclusion."  For many years, this amount was $10,000.  However, since 2002 it has also increased with inflation, and is now $18,000.  This means that you can give any person up tp $18,000 per year without reporting it to the federal government or having it count against your $13,610,000 exemption.  Annual exclusions apply to gifts to individuals.  They do not apply to gifts to trusts unless the trusts have specific provisions.

You can give $18,000 per year to any number of people, so if you have 5 children and 5 grandchildren, you could give them a total of $180,000 without any gift tax consequences.  If you are married, your spouse can give $180,000 as well.  There is also a special rule regarding Section 529 education accounts.  You are allowed to give use five annual exclusions in one year for contributions to a Section 529 account.  So, you could give $90,000 to a Section 529 account for your grandchild in 2024 (assuming you did not make other gifts to them) and make an election to count your 2025, 2026, 2027, and 2028 annual gift tax exclusions for the grandchild toward that gift.  You are required to file a federal gift tax return to make that election.

Even though you will not owe any gift tax until your lifetime gifts exceed your exemption amount (currently $13,610,000), you are required to report gifts that exceed the annual gift tax exclusion on a gift tax return.  Gift tax returns are due on April 15 of the year after the gift.  So, if you give your child $118,000 in 2024, you will need to report that in a gift tax return that will be due April 15, 2025.  The first $18,000 of the gift is excluded.  The remaining $100,000 will count against your lifetime exemption, meaning you can only give away another $13,510,000 during your lifetime or at your death.  Most of us will never come close to this amount and will never pay any gift tax or estate tax to the federal government.  (Illinois does not have a gift tax, but its estate tax exemption is only $4,000,000).

Gifts are not income to the person receiving them and are not deductible by the person making the gift, but there is a potential income tax downside to giving assets other than cash.  Assume you bought shares of Apple for $50 and they are now worth $200.  If you sold the shares, you would pay a capital gain of $150.  If you give the shares to your child, your child keeps your income tax basis, so if she sells the shares, she will have a capital gain of $150.  If you keep the shares until your death, they will receive a "step-up" in basis to the fair market value on the date of your death.  So if the shares are worth $200 on the date of your death, your child receives them under your will, and she sells them for $200, she will not have any capital gain.

Bottom line: if you're in a giving mood, feel free to do so – up to $13,610,000. 

This article is for informational and educational purposes only and does not constitute legal advice.