Gifting can be a tax-efficient way to transfer wealth before and after your passing, and there are many strategies available depending upon your situation and goals.
Gift Tax Exclusion – The IRS provides an annual gift tax exclusion of up to $17,000 (2023) to individual taxpayers. This means that you can gift cash, securities, or property to as many people as you want without paying any taxes, as a separate exclusion is applied to each recipient. In addition, gifts can be made from your spouse, so together each spouse can gift an amount up to the annual exclusion to the same person.
Gift Splitting – Married couples can use a technique called gift splitting, in which each spouse gifts an amount up to the annual exclusion to the same person, which doubles the gift without creating any gift tax. You must file a joint tax return to qualify and include Form 709, the gift tax return.
Gifting to Educational Institutions or Medical Providers – Gifts of tuition paid directly to an educational institution or medical expenses for someone else paid directly to the medical provider are not considered taxable and can be up to any amount.
Gifting to Qualified Charitable Organizations – When gifting to qualified charitable organizations, neither the donor nor recipient pays taxes. And donors may qualify for tax deduction. For gifts to non-qualified charitable organizations, recipients do not pay taxes, however donors may have to pay taxes.
Gifting Your IRA Qualified Charitable Distributions – Through a qualified charitable distribution (QCD), you can use your tax-deferred IRA to make donations to a qualified charitable organization and satisfy your required minimum distribution (RMD), thus not paying the taxes on your retirement savings. You must be 70.5 years of age to do this.
Non-Cash Gifting – Rather than selling your appreciated stocks or mutual fund shares that you’ve held more than a year and donating the after-tax proceeds, consider donating the shares to a qualified charitable organization that eliminates the capital gains tax you would have otherwise paid if you sold the securities and donated the cash.
Accelerated Gifting to 529 Plan – If you wish to gift a large amount to your children or grandchildren’s 529 Plans, you can utilize a technique called “superfunding”, that allows a lump sum contribution of five times the annual gift tax exclusion that is spread over five years. And beginning in the 2024-25 school year, distributions from grandparent-owned 529 plans will no longer be included in a student’s untaxed income, which historically had negatively impacted the student’s financial aid need.
When considering any gifting strategies, it is important to consider dollar limits and reporting requirements