Please Gift Responsibly: Gift Tax Tips

'Tis the season of giving, a time of year when individuals everywhere demonstrate their affection with gifts from the heart. Sometimes this means sentimental, homemade presents, but for others, this may mean lavish and expensive gifts. While you may not be on the naughty list this year, you may be on the IRS’ list of Americans whose generosity triggers the federal gift tax!

What is Gift Tax?

Gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. Under the Internal Revenue Code (“IRC”), gifts are taxable and must be reported when they are in excess of the annual gift tax exemption amount. In 2023, the annual exclusion amount is $17,000 (per individual donor to individual donee), but this exclusion amount is going up to $18,000 in 2024. For spouses, they can give twice the exemption amount per year ($34,000 for 2023 and $36,000 for 2024).

While the exemption amount may seem limiting, individuals should keep in mind that this limit is not a limit on total gifts given per year, it is a limit on total gifts from one specific person to another specific person. For example, in 2023 a grandparent can gift $17,000 to each of their 4 (or more) grandchildren (a total of $68,000 in gifts made) without having to pay gift tax. 

Are All Gifts Taxable?

As a general rule of thumb, all gifts are a taxable gift. The IRS does, however, specify that some gifts (regardless of their value) should not be subject to gift tax liability. Specifically, the following gifts are not taxable: (1) tuition or medical expenses you pay on someone else’s behalf; (2) gifts to your spouse, and (3) gifts to a political organization for its use.

Gifting and Trusts

For high-net-worth individuals or individuals who plan to make significant gifts, gifting to a trust may help to reduce your potential estate tax liability and ensure that the assets are utilized in a responsible manner. In short, estate tax is the tax incurred on your death if your assets are in excess of the state and/or federal estate tax exemption (currently $4 million per person in Illinois and $12.92 million per person federally). For high-net-worth individuals, proactive estate tax planning is critical – the earlier the better! For example, an individual, such as a parent, can make an annual gift into an irrevocable trust and pass the assets to their children. The parent can make gifts now, but the trust can have restrictions in place so that the child must utilize the assets in a responsible manner. By utilizing this structure, the asset can grow within the trust, not in the individual’s estate. So, while a gift may be worth $17,000 now, that asset may appreciate and be worth significantly more in the future. Consequently, when done correctly, on the parent’s death the trust assets will not be considered part of the parent’s taxable estate for estate tax purposes.

While you may not love all of the presents you receive this holiday season, a comprehensive estate plan can offer you tax mitigation, and peace of mind - the gift that keeps on giving! If you would like to schedule a free consultation to learn more, or to discuss how an estate plan can benefit you and your family, please call attorney Heather A. McCollum at (847) 705-7555 or email her at hmccollum@lavellelaw.com. Happy Holidays!