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The Gift of Tax Planning: Maximize Gifting While Minimizing Taxes

Dec. 21, 2021

The holiday season is around the corner, and many of us are thinking about what to get our loved ones. But did you know that there are tax considerations that should be kept in mind when making gifts? Proper estate planning can help maximize giving while minimizing taxes.

In this article, we'll take a look at gift taxes, how to avoid them, and how you can make gifts in the most advantageous way.

What is a Taxable Gift?

A taxable gift is a gift of money or property that is valued at over $15,000 in a given year (this amount will jump to $16,000 in 2022). For example, if you give your child more than $15,000 in 2021, then the excess amount is taxable.

In addition, if you give more than $15,000 in a year to any one person or entity, then it will be subject to gift tax and the excess amount may need to be reported on your income tax return. For example: If you have three children and each of them receives gifts valued at over $15,000, then you will need to report the excess amount on your income tax return.

However, if each of these gifts were made in a separate year and not within 365 days of any other gift (for example one child gets $15,000 today; another next week; another three months from now), then they would be considered to be separate gifts and would not be subject to the gift tax.

Each of these amounts will need to be reported on your income tax return, but there is no limit as far as how many times you can make a $15,000 gift without it being considered taxable (for example you can give each child up to $15,000 each year for the next three years, even if you make other gifts in between).

If one of these amounts were to be given within 365 days (for example two children receive $15,000 today), then it would be considered a "split gift" and will not be subject to taxation. However, any amount that is over $30,000 will be subject to the gift tax.

The good news is that there is a lifetime exemption from gift tax of $11,700,000 in 2021. This means that you can give away up to $11,700,000 during your lifetime without having to pay any gift taxes on it. In addition, any gifts given above the $11,700,000 exemption will only be taxed at the rate of up to 40%.

How Can I Avoid Gift Taxes?

There are a few ways you can use estate planning tools to help you avoid or minimize gift taxes:

  • Give property rather than cash. The value of gifts of property is not subject to gift tax, as long as the property is given to a qualified organization.

  • Give up all interests in the gift, such as having life estate deeds or remainder interest deeds where you have given away your entire ownership of an asset and no longer get any income from it. In addition, this will avoid future capital gains tax on the appreciation of that asset going forward (if it is sold).

  • Make gifts to a spouse. Gifts to a spouse are not subject to gift tax, regardless of the amount.

  • Use your lifetime exemption. As mentioned earlier, each individual has a $11,700,000 lifetime exemption from gift taxes. You can use this exemption to give away up to $11,700,000 without paying any gift taxes on it. Gifts made during your lifetime can also reduce your taxable estate!

  • Make gifts of up to the annual exclusion amount ($15,000 per recipient) each year for as many recipients that you wish (i.e., multiple children or grandchildren).

My Office Can Help You Make Giving as Part of Your Estate Plan

Contact us today if you have questions about how best to make gifts this holiday season. Schedule a free strategy session and we’ll discuss how to incorporate giving into your estate plan and ways you can maximize giving while minimizing gift taxes.

Parenting Tip:

This week's parenting tip is about how to make the holidays less stressful for your children. One way to do this is by involving them in the gift-giving process. Have them help you pick out gifts for their friends and relatives, or have them wrap the gifts themselves. This will not only give them a sense of ownership and involvement in the holidays, but it will also help to reduce your stress level as well.