Understanding the Tax Implications of Gifting Over $15,000 in 2023 and Beyond

The limits for gifting have recently been adjusted due to inflation. For 2023, the threshold to trigger gift tax has been raised to $17,000, and it will be further increased to $18,000 in 2024. When giving to your spouse, you and your partner can each give the maximum amount. This flexibility allows you to distribute the limit among multiple beneficiaries, such as giving to your son, his wife, and your two other children and their spouses. However, if you gift assets valued over these amounts, you will need to report the transaction to the IRS using the appropriate forms.

The Consequences of Exceeding the Gift Tax Threshold

Should you choose to give a house or other significant assets to someone, you may find yourself in a situation that requires reporting through Form 709. The Internal Revenue Service (IRS) will keep track of these gifts, and when the cumulative gifts exceed $13.61 million, you will start owing both gift and estate tax. It is crucial to note that in 2026, the exemption amount will revert to approximately $7 million, which is the level seen in 2011, adjusted for inflation.

The Basis of Gifts and Inheritances

One of the key aspects to understand is the concept of cost basis. When you give a gift, the cost basis remains the same as what you originally paid for the asset. This means that the recipient may continue to benefit from the same value as you did, without an immediate adjustment in the basis.

When someone inherits an asset, the cost basis changes to the fair market value (FMV) at the time of the inheritance, a rule often referred to as 'step-up in basis.' This adjustment can be particularly advantageous for beneficiaries, as it can reduce the capital gains tax liability that may otherwise be incurred if the asset is later sold.

Strategies for Managing Gifting

Given the complexities and potential tax implications, it is advisable to consult with a tax professional. They can help you navigate the intricacies of the gift and estate tax laws, ensuring you make informed decisions and comply with the legal requirements.

Avoiding the gift tax threshold does not only mean strategic planning but also considering the long-term impact on both the donor and the recipient. It's essential to strike a balance between fulfilling the needs of loved ones and preserving your financial stability.

Conclusion

Gifting large sums of money or assets can have significant tax implications. Understanding these implications and the regulations governing gifting will help you make informed decisions. By staying aware of the limits and potential tax consequences, you can ensure that you are in compliance with IRS regulations and can make thoughtful gifting decisions that benefit both you and your beneficiaries.