As we approach the end of the year, many people begin to think about making gifts to family members. Each year, we receive numerous inquiries regarding the tax implications of making gifts. Below is a summary of some of the most important items to be aware of around gifting.

Gifts Are Not Taxable Income to the Recipient

The receipt of a gift is not a taxable event for the recipient. Future income or gains generated from the gifted asset will result in taxable income for the recipient. It is important to note the cost basis of the gifted asset to determine future capital gains the recipient of the gift will incur.

Annual and Lifetime Gift Exclusions

Individuals can make gifts to any other individual in a calendar year, up to the annual exclusion amount set by the Internal Revenue Code. In 2023, the annual exclusion amount is $17,000. A married couple can effectively make gifts each year of up to $34,000 to a specific person. A married couple can elect to split gifts, whereby a gift from one spouse can be treated as though one-half of the total gift was made by each spouse. For example, if you are married and have two children, you could each make gifts to each child in the amount of $17,000, for a grand total of $68,000.

If a gift to an individual in a calendar year exceeds the annual exclusion amount, you will then begin to utilize your lifetime exclusion and will be required to file a Form 709 Gift Tax Return. The lifetime exclusion for each person in 2023 is currently $12.92 million ($25.84 million for married couple). Form 709 Gift Tax Return is filed to report and track the utilization of the lifetime exclusion. Gift tax would not be payable unless the total of all gifts exceeds the lifetime exclusion amount. Upon death, any remaining lifetime exclusion can then be used to pass assets to heirs free of estate tax.

It is important to note that the lifetime annual exclusion amount is currently scheduled to revert back to pre-2018 amounts ($5.49 million adjusted for inflation) on January 1, 2026, unless action is taken by Congress to extend the higher amount.

Payments Directly to Educational or Medical Institutions

Payments made directly to an educational or medical institution for the benefit of another individual do not count toward the annual or lifetime gift exclusion. This provision allows for gifts to pay for education or medical expenses without gift or estate tax implication.

Five-year Gift Election for Contributions to 529 Plan Accounts

A special election allows a larger upfront contribution to a 529 plan of up to five years of the annual exclusion amount. For example, a contribution of $85,000 can be made to a 529 plan account today. Under the special election made on Form 709 Gift Tax Return, the gift can utilize the next five years of annual exclusion amount and will not utilize any of the lifetime exemption. The annual exclusion will then not be available for the next five years for gifts to that specific individual.

Please reach out to your CCM advisor if you have any questions about the content outlined here or would like to discuss a year-end gifting strategy.

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.