Still trying to find the perfect Christmas gift for those hard-to-shop for relatives and friends? Give ’em a box full of cash! Everyone loves getting money … and it could be a smart tax move for you, too.
First, if you’re careful, you won’t have to pay any federal gift tax when you give cash below a certain amount. Second, wealthier Americans who are worried about the federal estate tax can actually reduce (or eliminate) their estate tax liability by giving smartly through the years.
So, let me show you how you can give money without paying the gift tax now, and cut down your estate tax bill later.
Tax-Free Gifts Now
Gifts of cash or property are generally subject to the federal gift tax. But there’s a very important loophole that anyone can take advantage of—it’s called the annual gift tax exclusion. Thanks to this tax code provision, you can give up to $17,000 this year to a family member, friend, or anyone else without having to worry about the federal gift tax. If you’re married, you and your spouse can team up and give $34,000 to someone in 2023. [Note: If you don’t give cash, the fair market value of the property is used for purposes of the exclusion.]
As an added bonus, the exclusion applies on a per person basis, so you can give up to $17,000 (or $34,000 with your spouse) to as many people as you want this year. For example, if you’re single with one married adult child and two grandchildren, you can give $17,000 to your child, $17,000 to your child’s spouse, and $17,000 to each grandchild in 2023 without paying a single penny in gift taxes. That’s a total of $68,000 in tax-free gifts!
If the total amount of gifts to any one person exceeds the annual gift tax exclusion, it must be reported to the IRS on Form 709. However, that doesn’t necessarily mean you’ll owe any tax for those gifts. The federal tax on gifts only applies if the lifetime gift tax exemption for the year is surpassed. For 2023, the lifetime exemption is a whopping $12.92 million ($25.84 million for married couples). So, as you can see, the federal gift tax basically only impacts rich people.
WealthUp Tip: The gift tax exclusion is adjusted annually to account for inflation. The 2024 annual gift tax exclusion is $18,000 ($36,000 for married couples). The lifetime exemption for 2024 is $13.61 million ($27.22 million for married couples).
Scheduled Reduction of Lifetime Exemption
One other thing worth noting is that the Tax Cuts and Jobs Act of 2017 temporarily doubled the lifetime gift tax exemption from 2018 to 2025. After that, the amount is scheduled to drop back down to pre-2018 levels, as adjusted for inflation (estimated to be between $6 million and $7 million).
Lawmakers could step in and extend the higher amounts before 2026, but that will depend on who controls Congress and the White House after the 2024 elections. However, if that doesn’t happen, the IRS has already stated that people who take advantage of the higher exclusion amounts won’t be adversely impacted after 2025 when the exclusion amount goes back down.
Related: 13 Best Mutual Funds to Buy
Lower Estate Taxes Down the Road
So how can giving cash gifts now lower your estate tax? Money (or other property) you give away now won’t be included in your taxable estate when you pass away … which means you won’t pay estate taxes on it.
For example, if your estate is currently worth more than the estate tax exemption, which is $12.92 million for people who die in 2023 ($25.84 million for married couples), giving away cash or assets now might reduce the value of your estate below the exemption amount for the year you die. That would mean your estate won’t be liable at all for federal estate taxes.
However, even if the value is not lower than the exemption amount, there will be less to tax, which will at least reduce the amount of estate tax owed. And since the federal estate tax rates range from 18% to 40%, this can still save your heirs a lot of money.
WealthUp Tip: The estate tax exemption for 2024 is $13.61 million ($27.22 million for married couples).
Scheduled Reduction of Estate Tax Exemption
You may have noticed that the estate tax exemption is the same as the lifetime gift tax exemption. Since they’re linked, the estate tax exemption will also drop significantly in 2026 (assuming the law isn’t changed before then).
As a result, even if the value of your estate isn’t above the current estate tax exemption amount, it might be after 2025. That can happen even with the IRS regulations protecting tax-free gifts made through 2025.
So, if you’re at risk of being hit with the federal estate tax, you have an extra incentive to give cash (or property) away now—without surpassing the annual gift tax exclusion—to reduce the value of your estate before you die.
Related: Charitable Tax Deduction: What to Know Before Donating
State Estate Taxes
Finally, don’t forget about state estate taxes. According to the Tax Foundation, the following jurisdictions impose their own estate tax (with 2023 exemption amounts).
| State | Estate Tax Exemption |
|---|---|
| Connecticut | $12,920,000 |
| District of Columbia | $4,528,800 |
| Hawaii | $5,490,000 |
| Illinois | $4,000,000 |
| Maine | $6,410,000 |
| Maryland | $5,000,000 |
| Massachusetts | $2,000,000 |
| Minnesota | $3,000,000 |
| New York | $6,580,000 |
| Oregon | $1,000,000 |
| Rhode Island | $1,733,264 |
| Vermont | $5,000,000 |
| Washington | $2,193,000 |
So, even if your estate is currently worth less than the federal estate tax exemption, it might not be worth less than your state’s estate tax exemption amount—in which case, you might want to consider making gifts now to lower the value of your estate before you’re gone.
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