As we immerse ourselves in the festive spirit, the joy of gifting to loved ones becomes a central theme. While the gesture of giving holds sentimental value, it is prudent to be aware of the implications, especially concerning the complexities of gift tax laws. This article aims to provide you with an understanding of the current gift tax laws and possibilities for charitable donations.

The gift tax, a federal levy on the transfer of property or money without any reciprocal receipt, is typically the responsibility of the donor rather than the recipient. Calculating potential tax liabilities involves assessing two critical factors: the annual gift tax limit and the lifetime gift tax limit.

For 2023, the annual limit stands at $17,000 for individuals, while married couples enjoy a joint limit of $34,000 ($17,000 each). It is essential to note that any amount exceeding this limit necessitates the filing of IRS Form 709 when filing your taxes. The excess over the annual limit is deducted from the lifetime gift tax exclusion. It is noteworthy that these gifts can be made to more than one individual and the annual limit will increase to $18,000 ($36,000 for married couples) in 2024.

The lifetime exclusion, significantly increased by the Tax Cuts and Jobs Act of 2017, currently stands at $12.92 million for individuals and $24.8 million for married couples in 2023. While this generous exemption ensures that gift taxes are not a concern for many, reporting these gifts to the IRS is necessary for tracking purposes. Gift tax rates, ranging from 18% to 40%, apply to amounts surpassing the lifetime exclusion and are subject to annual inflation adjustments.

It is important to highlight that the estate tax exemption faces a “sunset” provision, set to expire on January 1, 2026. Without congressional intervention, the lifetime exemptions will revert to 2017 levels, estimated at around $7 million for individuals and $14 million for married couples, after adjustments for inflation.

An alternative approach to holiday giving involves charitable donations. To qualify for deductions, donations must be directed to a qualifying 501(c)(3) organization, and itemizing deductions is necessary. The standard deduction is currently set at $13,850 for single filers and $27,700 for those married filing jointly.

For those seeking tax-efficient giving, Qualified Charitable Distributions (QCDs) offer a strategic option. These direct transfers of funds from an IRA to a qualified charity count towards required minimum distributions, are exempt from tax withholding, and do not require itemizing deductions. However, it is imperative to distribute funds directly to the charitable organization before December 31st and adhere to specific guidelines, underscoring the importance of consulting a tax professional and working with a CERTIFIED FINANCIAL PLANNER™ Professional.

Entering this holiday season presents an opportune moment for thoughtful giving. Approaching our generosity with both heart and prudence and exploring avenues such as charitable donations and qualified charitable distributions allow us to amplify the impact of our giving while potentially optimizing our financial situation. Remember, consulting with a tax professional and the CERTIFIED FINANCIAL PLANNER™ Professionals at The Normandy Group can provide personalized guidance, ensuring that your contributions bring joy without unwarranted complexities.

Wishing you a happy holiday season.

Derek Landis, CFP®

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