If you could deduct gifts to your children would be a wonderful way to provide for their future, create lasting memories, and potentially reduce your taxable estate. However, it’s important to understand the federal tax rules that apply to such gifts. In 2024, the rules regarding gift taxes have some specifics that can impact how much you can give without incurring taxes.
Overview of Gift Tax Limits for 2024
For the year 2024, the annual gift tax exclusion amount has increased to $18,000 per recipient. This is an increase from $17,000 in 2023, reflecting adjustments for inflation. For married couples who choose to split gifts, the combined limit is $36,000 per recipient. This means you and your spouse can give up to $36,000 to each child without any gift tax consequences.
Impact of Gifts on Estate Taxes
While monetary gifts to your children are not deductible on your federal income taxes, they can significantly reduce the size of your estate and potentially lower future estate taxes. The lifetime gift and estate tax exemption for 2024 is $13.61 million, allowing you to give away a significant amount over your lifetime without incurring gift taxes. It’s important to track these gifts, as they count against the lifetime exemption amount from the estate tax that applies at the time of death. Notably, the exemption is projected to decrease to $7 million in 2026, making strategic gifting even more crucial in the upcoming years.
Exceeding the Annual Exclusion
If you give more than the annual exclusion amount of $18,000 to any one person in 2024, the excess amount will start to utilize your lifetime exemption limit. For example, if you give $25,000 to a child, $7,000 of that gift ($25,000 – $18,000) will count against your lifetime exemption. If you haven’t yet exceeded the threshold set by the lifetime exemption, no taxes will be due immediately, but it reduces the amount you can transfer tax-free in the future.
Making Unlimited Payments for Education and Medical Expenses
One notable exception to the gift tax rule allows for unlimited gifts if you pay directly for someone’s medical expenses or educational tuition. These payments must be made directly to the medical institution or educational institution and do not count against either the annual gift tax exclusion or your lifetime exemption.
Strategic Gifting Considerations
When planning gifts to your children, consider their current and future financial needs, as well as your own financial situation. Strategic gifting can help maximize the financial benefits for both you and your children, especially in light of potential changes to tax laws in the future.
Consulting with a Professional
Given the complexities of tax laws and potential implications for your financial strategy, consulting with a Fee-Only financial adviser, accountant or attorney is advisable. A Fee-Only financial adviser can provide guidance tailored to your specific circumstances and help ensure that your gifting strategy aligns with your overall financial goals.
Conclusion
Gifting to your children in 2024 offers a valuable way to transfer wealth efficiently while managing potential tax implications. By understanding the gift tax rules and planning strategically, you can make the most of the opportunities available under the current tax laws. Remember, the landscape of estate and gift taxation can change, so staying informed and consulting with independent and experienced professionals is crucial to making informed decision.
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