2023 YEAR-END GIFT PLANNING
If you are unfamiliar with various aspects of gifting money or property and are concerned that receiving or making a gift will produce a taxable event, this article will help you. Here we clarify some key information for giving or receiving money, when to get advice from your tax professional, and information about Donor Advised Funds, which are excellent vehicles for charitable giving.
Under current tax law, a gift to a recipient (donee) is typically not taxable and is not reported as income. Gifts from donors can be excluded from tax by not exceeding the Annual Gift Tax Exclusion (see below) or exempted from gift tax by using the Lifetime Gift and Estate Tax Exemption.
Year-end is near and now is the time to plan for intended gifts. Please consult with your tax professional about tax Form 709 for any gift that exceeds the Annual Exclusion amount and consult with your financial advisor about the effect of intended gifts on your financial situation before making the gifts.
THE ANNUAL GIFT TAX EXCLUSION
IRS rules allow a donor to give up to $17,000 to an individual (donee) in 2023, with no gift tax. This is the Annual Gift Tax Exclusion, which will remain at $17,000 in 2024.
A donor can gift $17,000 in December 2023 and $17,000 in January 2024, to the same donee ($34,000 total), as gifts fall into 2 calendar years. Married donors can each give $17,000 to a donee in 2023, and they can each give $17,000 to the same donee in January 2024, for a grand total of $68,000, with no gift tax. Married donors need to file tax Form 709 to elect gift splitting so that the IRS knows they have not exceeded the annual limit per donor. This is because total gifts from the same household exceed $17,000.
If a donor’s gift exceeds $17,000 in 2023, the donor must file Form 709 to report the amount that exceeded $17,000 and either pay gift tax on it, or elect to deduct the overage from their Lifetime Gift and Estate Tax Exemption (see next section). Larger gifts are common for parents helping adult children with down payments on homes, for example. Gift tax is normally paid by the donor, not the recipient.
529 College Savings Plans: Donors can gift up to 5 years X the annual exclusion at one time into a 529 Plan. This can allow for $85,000 to be gifted into a child’s 529 college savings plan, or $170,000 from married donors, in 2023 for example. No further exclusion-amount gifts can be made to the child or 529 plan by the same donor(s) until the 5 years have passed. Then the donor can repeat the 5-year prefunding. 529 Plans are generally tax advantaged in that earnings and growth of account value are not taxed if funds are used for qualified education costs. Your tax professional can guide you.
LIFETIME GIFT AND ESTATE TAX EXEMPTION
Current IRS rules provide for a Lifetime Exemption on Gift and Estate Tax of $12,920,000 per person in 2023. A married couple has double this amount, or $25,840,000, in 2023. The exemption limit is scheduled to reduce to roughly $6,500,000 at the start of 2026 unless the tax rules are changed. Planning is important as you can see.
The Lifetime Exemption limit is the amount a donor would have to reach, and exceed, before any gift taxes are to be paid. This means that you can gift significant amounts of property, cash or stock to others with no gift taxes having to be paid. For households with higher net worth, gifting during your lifetime is a very effective way to reduce potential estate taxes that could occur after death.
What is important to understand is that there is no gift tax due on any gift exceeding $17,000 per donor, per recipient, per year until the Lifetime Exemption amount has been exceeded, provided that Form 709 is correctly filed with the election that any gift exceeding the annual exclusion amount is to be deducted from the Lifetime Exemption. Your tax professional can help you on this!
DONOR ADVISED FUNDS – A GREAT TOOL FOR CHARITABLE GIVING
Donor Advised Funds (DAF’s) are charitable accounts commonly available at brokerage firms such as Charles Schwab or Fidelity Investments. They are very efficient for gifts of appreciated assets, such as stocks or mutual funds, to qualified charities.
People with taxable investment accounts that contain stocks or mutual funds that have appreciated in value can transfer assets into a DAF. The donor chooses how much in assets is transferred to the DAF. The transfer is irrevocable and final. Upon deposit of appreciated assets to the DAF, the charitable contribution is completed and the tax deduction can be taken. The assets are sold inside of the DAF and there is no capital gain tax. The account holder (you) can execute “grants” of desired amounts to qualifying 501c3 charities of your choice, on the schedule you choose, even if it is in the following calendar year or beyond.
If you are interested in establishing a DAF account in 2023, allow time to open the account, and to fund it. It is wise to have appreciated assets deposited by 12/15/23 or sooner. Each institution will have a funding deadline to be assured of your ability to have the charitable deduction for this year.
We are always glad to help with questions and please don’t hesitate to call for assistance. Consult with your tax professional as there are IRS rules about standard deductions and income levels.that can affect the donor’s actual tax charitable deduction.
Written by Ann Timoney
Personal Financial Advisor, CFP®
atimoney@opeswealth.com / 408-981-1335 C
Disclaimer: Client tax situations are unique and specific, and you are encouraged to consult a tax professional to analyze your specific situation. This material has been prepared for informational purposes only, and is not intended to provide tax, legal or accounting advice; nothing contained in these materials should be taken as such. The opinions expressed in this article are not intended to provide specific advice or recommendations for any individual or on any specific tax strategy or security. The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Opes Wealth Management cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Advisory services are only offered to clients or prospective clients where Opes Wealth Management and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Opes unless a client service agreement is in place.
