Monetary gifts to children are not tax-deductible for federal income taxes; however, if the gift is under $17,000 in 2023, it can be a great way to create lifetime memories and provide financial support. It can also have a significant impact on reducing estate taxes.
The annual gift tax exclusion for 2023 is $17,000 for a single person and $34,000 for a married couple. This means that you can give gifts up to these amounts without them being subject to gift taxes. Additionally, the lifetime personal gift tax exclusion for 2023 is $12.92 million (or twice that amount if you are married). This means that you can give away a total of $12.92 million over the course of your lifetime without any gift taxes being applied.
If you give more than $17,000 you will start to eat away at the lifetime exclusion. For example, if you are a single person and you give a gift of $20,000, the difference of $3,000 ($20,000 less $17,000) would reduce your lifetime exclusion. This means that if you have not yet reached your lifetime exclusion limit, you would have $3,000 less available to give away without gift taxes being applied.
It's worth noting that a single person can give up to $17,000 to an unlimited number of people (including children, grandchildren, etc.) without reducing your lifetime exclusion.
In addition to making direct monetary gifts to individual children, you can also make unlimited payments directly to medical providers or educational institutions on behalf of others for qualified expenses without incurring a taxable gift.
While gifting money to children can have a positive impact on estate taxes, it's important to consider your overall financial situation and the needs of your children before making a gift. It's also important to consult with a financial advisor to ensure that your gifting strategy aligns with your overall financial goals.
Finally, it's worth noting that the current estate tax exemptions are scheduled to be reduced to lower amounts in 2025. Thus, current tax laws are favorable now to reduce the taxable value of estates.
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