Although it’s the season of giving, no one has Uncle Sam on the gift-giving list. Luckily, the law provides you many opportunities to give gifts to family, friends, and charities without having to include the IRS. Some are straightforward, while others may require the help of a professional.
Your Yearly Coupons
Each year on January 1st, everyone receives what can be thought of as yearly coupons for tax-free gifts. There are several different ways that you can redeem those coupons:
- Annual exclusion gifts. These gifts are transfers of money or property that do not exceed the annual gift tax exclusion. These gifts can be given on one, or more than one occasion, throughout the year, the key is that you add up the gifts throughout the year. In 2022, you can give up to $16,000 ($32,000 for married couples) per recipient without having to pay any gift tax or file a gift tax return. This exclusion will increase to $17,000 ($34,000 for married couples) in the year 2023. These gifts can be cash or property but they must be of a “present” interest. Gifts using trusts or certain types of property (like closely held businesses) can be tricky because the “present” interest requirement can be missing. If you plan on using a trust or an LLC to make your gift, it’s best to work with a certified specialist.
- Pay medical bills. The IRS also allows you to pay an unlimited amount of someone’s medical bills, without worrying about the gift tax. However, the payment must be made directly to the doctor, hospital, or other medical provider in order to qualify.
- Pay tuition. Additionally, you are able to pay an unlimited amount of tuition bills for the benefit of someone else, as long as the tuition is paid directly to a qualified educational institution. One big issue here is that the gift must be only for tuition. Books, fees, living expenses, travel, and other costs of education do not qualify.
- Give to charity. For those of you who are philanthropically minded, you can give as much money or property to a qualified charity as you want without worrying about the gift tax. This includes gifts to private foundations or Donor Advised Funds (DAFs). As an added benefit, unlike the gifts above, you may also be entitled to an income tax deduction for the charitable gift.
Lifetime Coupon
In addition to our annual coupons, we all have a lifetime coupon for taxable gifts, those that exceed or do not qualify for the annual exclusion, called the unified credit. It’s called a unified credit because it unifies the gift tax with the estate tax into a coordinated tax system. Unlike the annual coupons explained above, once you spend the value of the unified credit coupon for a taxable gift, it’s gone.
Many people assume that because it says taxable gifts, they’ll have to pay the gift tax. Luckily because of the unified credit coupon, most people will never have to actually pay any gift tax. You only have to pay gift tax if your lifetime gifts exceed the unified credit coupon. Under the current law, the base amount of the unified credit starts at $10 million and increases each year through 2025. In 2022, the unified credit amount is $12.06 million (due to increase to $12.92 million in 2023). The unified credit is scheduled to be cut in half in 2026. However, you can use the current unified credit now and there is no penalty if the credit is later reduced. Also remember that if you make a taxable gift, you are required to file a gift tax return (IRS Form 709) with your income taxes.
When should I talk to an estate planner?
If you plan on making a gift in excess of $16,000 in 2022, or if you want to use the current $12.06 million unified credit before it is reduced, then you should talk with a certified specialist in estate planning first. Sometimes the best way of making a gift is to just write a check, but other times gifting in a trust, through an LLC, or with an undivided interest in property can leverage your unified credit to gift even more and offer your recipient greater benefits (like privacy or asset protection).
While we don’t suggest you give away anything that you might need, if you do have some surplus, gifting programs are a fun way to see your loved ones enjoy your generosity. We would love to help you plan your gifting program to make the most of your gifts and provide you and your family the most value for lifetime exemption.