As the year draws to a close, it's a great time to consider your financial and tax strategies. One beneficial approach to both reduce estate taxes and support your loved ones is to make cash gifts before December 31. Under current tax laws, you can gift a certain amount each year without incurring gift taxes or needing to file a gift tax return. By using this annual exclusion, you can gradually reduce your taxable estate while sharing financial benefits with family and friends.
Each year, taxpayers are allowed to transfer substantial amounts to children or other recipients free of federal gift taxes, thanks to the annual exclusion, which is adjusted for inflation. In 2024, the exclusion amount is $18,000. This means you can give up to $18,000 per recipient, per year, without triggering a gift tax. For example, if you have three children, you could transfer a total of $54,000 ($18,000 × 3) to them in 2024, free from federal gift taxes. As long as individual gifts to recipients stay within the $18,000 limit, there’s no need to file a gift tax return. However, if your annual gifts exceed $18,000 to any recipient, only the excess amount is taxable.
Note: These rules do not apply to gifts between spouses, which are typically exempt from gift tax under separate marital deduction rules.
Gift Splitting for Married Couples
If you're married, you and your spouse can combine your annual exclusions by "splitting" gifts, even if only one spouse actually provides the gift. Through gift splitting, a married couple can transfer up to $36,000 per recipient each year. For instance, if you have three married children, you and your spouse could transfer up to $216,000 ($36,000 × 6) annually to your children and their spouses, free from federal gift taxes.
When gift splitting is used, both spouses must agree to it by indicating their consent on their respective gift tax returns. If a single spouse's gift to a recipient exceeds $18,000, a gift tax return is required—even if the combined $36,000 exclusion covers the total gift amount.
Additional Considerations
Even if a gift exceeds the annual exclusion, it may not create an immediate tax liability, thanks to a lifetime tax credit. This credit covers the federal gift tax on taxable gifts up to a cumulative $13.61 million in 2024. However, using this credit reduces the available credit against federal estate tax when you pass away.
For a gift to qualify under the annual exclusion, it must be a "present interest" gift—meaning the recipient must be able to enjoy it immediately. Other rules may also apply. If you have questions or need assistance preparing a gift tax return, especially if you've exceeded the $18,000 or $36,000 limits this year, we’re here to help. 'Tis the season!