A gift that truly is “free”
- Mario Zumbo
- Aug 29, 2024
- 2 min read
Tax free that is. A common but sometimes misunderstood part of many families' gifting and estate plans incorporates the annual gift tax exclusion. The IRS allows individuals to give away a certain amount of cash, assets or property each year tax-free. For 2024, the amount is $18,000.
Any individual can give or gift up to $18,000 to any other individual without incurring a gift tax or having to file a gift tax return. A married couple can each gift the same individual $18,000 for a total of $36,000. A husband and wife could gift their adult daughter a combined $36,000 and their son-in-law a combined $36,000 for a total of $72,000. A grandparent could gift $18,000 to all 8 of his grandkids or 12 of his best friends, just because. Note, the gift tax does not apply to spouses or dependents.
What happens when someone gifts an amount above the annual exclusion of $18,000? There still is no gift tax owed. However, the amount above the $18,000 would need to be reported using Form 709 and it would be subtracted from one’s lifetime exemption amount. For 2024, each individual has a lifetime exemption of $13.61 million.
Let’s say a married couple wants to help their son buy his first house and gifts him $100,000 for a downpayment. The combined annual exclusion of $36,000 less the $100,000 equals $64,000 that would need to be reported to the IRS for that given year and thus reduce their lifetime exemption by an equivalent amount.
Other common areas where familial support frequently occurs is with education/tuition payments and medical expenses. The gift tax does not apply for gifts or payments made directly to the education or medical institution. However, it’s common to see a grandparent gift funds to their son or daughter to help pay for education expenses for a grandchild. If the money goes to the parents first rather than directly to the school, it is technically a gift to the individual and the gift tax rules apply. If the intent is to pay for educational or medical expenses and the amounts will exceed the annual exclusion limits, the safe bet is to make the payments directly to the institution. Especially, if there is a desire for other gifting.
529s have an added benefit. One can front-load up to 5 years’ worth of annual gifts to fund a 529. Using grandma and grandpa as the example again, they could each contribute $90,000 to a grandkid’s 529 for a total of $180,000 in 2024. However, they would be precluded from making any additional gifts to the beneficiary during that period without utilizing some of their lifetime exemption.