Gift Tax Exemptions Explained

Last month, we dove into reasons why gifting expensive assets can create financial challenges for both sides of the exchange. Even if the holidays have passed, it’s important to start 2023 with a clear understanding of the financial consequences of gifting.

You should be aware of both the annual gift tax exemption and the lifetime estate/gift tax exemption when considering high-value gifts. Both of these numbers play off each other as you gift throughout the year and your lifetime.

Understanding the Annual and Lifetime Exemptions

Before we look at the numbers, it’s important to understand what each of these exemptions mean for you. There are common misconceptions that can trip up individuals and their estates.

The annual exemption is an amount applied per recipient ($17,000 per recipient in 2023). This means you are exempt from reporting gifts up to the annual exemption per person you gift to. If you exceed the annual exemption by gifting an excess amount to one individual, this does not take away from your ability to gift below the annual exemption to another individual. Exceeding the annual gift tax exemption does not incur immediate taxes, but instead lowers the amount of your lifetime estate exemption.

The lifetime exemption applies to your estate. This number represents the total value of your estate that will be exempt from federal estate taxes. When an individual dies, the lifetime estate tax exemption for that year applies to the estate. The transfer of an estate valued below this number will not be taxed and only the amount above this number will be subject to federal estate taxes (and state taxes, where applicable).

Annual and Lifetime Exemptions Continue to Rise

The good news is that on January 1st, both the annual gift tax exemption and the lifetime exemption went up. The annual exemption amount per recipient to $17,000 – up from $16,000 in 2022. The lifetime exemption went up $12.92 million per individual – up from $12.06 million in 2022. Married couples have a $25.84 million lifetime exemption compared to $24.12 million last year.

The lifetime exemptions will continue to rise over the next few years unless the federal government reverses the current projections. While we don’t know the official numbers yet, we can expect the lifetime exemption to increase to nearly $14 million in 2024 and nearly $15 million in 2025 before a significant decrease in 2026 to pre-2018 levels which will be roughly $6 million each.

IRS officials say those who take advantage of the increased gift exemptions between now and January 1, 2026, will not be adversely impacted.

Calculating Gift Taxes

So, how does this all work for you? Gifts above $17,000 in 2023 aren’t automatically taxed. Instead, the amount above $17,000 will be reported to the IRS and then deducted from your lifetime exemption.

For example, if you make a gift of a $40,000 car to an individual in 2023 then you will have exceeded the annual amount by $23,000. This amount must be reported to the IRS which will then be deducted from your lifetime estate exemption of $12.92 million – you will have a $12.69 million estate tax exemption remaining. If a married couple makes the $40,000 car donation together then the couple splits the $23,000 excess – taking $11,500 away from their individual lifetime estate exemption. Married couples have a combined lifetime exemption but would revert to the individual exemption if they were to get divorced.

Understanding tax law can be a complicated matter for even the most experienced and savvy individual or businessperson. At the Law Offices of Tyler Q. Dahl, we work with businesses and families to ensure these and other tax guidelines are a part of their tax and legal strategy Contact our team for assistance in maximizing your gifting abilities and protecting what you’ve worked hard to build.

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