Gifting assets during your lifetime can be a strategic way to manage your estate and provide for your loved ones. However, it’s important to understand the tax implications associated with such gifts to avoid unexpected financial consequences.
Gift tax and exemptions
In the United States, the IRS imposes a gift tax on the transfer of assets from one person to another without receiving something of equal value in return. Each year, there is an annual gift tax exclusion amount, allowing individuals to gift up to a certain amount per recipient without incurring gift tax. For 2024, this exclusion amount is $18,000 per recipient. Gifts that exceed this amount may be subject to gift tax, though there is also a lifetime exemption that can offset this tax.
Basis and capital gains
Another important consideration is the basis of the gifted asset. When you gift an asset, the recipient inherits your basis in the property. This means that if the recipient later sells the asset, they may be subject to capital gains tax on the difference between the sale price and the original basis. For assets that have appreciated significantly, this can result in a substantial tax liability.
Impact on estate tax
Gifting assets during your lifetime can also impact your estate tax liability. By reducing the size of your taxable estate, you may be able to reduce estate taxes upon your death. However, it’s crucial to balance the benefits of gifting with the potential gift and capital gains tax implications.
Planning ahead
Thoughtful planning when gifting assets can significantly impact your financial legacy and the well-being of your loved ones. Being mindful of the factors that impact these gifts ensures your gifts are both generous and tax-efficient, securing a better financial future for your family.
