End of Year Gifting and Tax Changes

Dear Friends,

As another year draws to a close and the season of giving comes into full swing, it is an ideal time to consider the significant advantages of tax-free gifting. In this edition of our newsletter, we delve into the topic of charitable gifting and maximizing the annual exclusion amount as integral components of your estate planning. These powerful tools not only allow you to express your generosity but also offer significant tax advantages, both now and in the future. Let’s explore how these strategies can become the gift that keeps on giving.

Annual Exclusion Amount: Maximizing Your Gifting Potential

What is the annual exclusion amount and how can it contribute to my estate plan?

The annual exclusion amount, currently set at $17,000 for the tax year 2023, provides a unique opportunity to make tax-free gifts. This exclusion allows you to give up to this specified amount per recipient each year without incurring gift tax. Married couples can double their gifting power by leveraging both spouses’ Annual Exclusion Amounts. This means that married couples can gift a total of $34,000 to a single recipient tax-free.

Making use of the annual exclusion amount has the long-term benefit of reducing your taxable estate. The IRS imposes a lifetime limit on how much an individual can transfer to others before incurring taxes. The current lifetime amount that can be transferred tax-free (not including annual exclusion gifts) is $12.92M per person. This $12.92M exemption covers estate and gift taxes and includes both lifetime gifts and the value of one’s estate. By taking advantage of annual exclusion gifting, you can transfer assets out of your estate without chipping away at this lifetime exemption.

How much can I gift tax-free?

There is no limit to how many recipients you can make gifts to; so long as no one recipient receives more than $17,000, no gift tax will be owed. For example, a client could gift $17,000 to each of their five grandchildren, effectively transferring $85,000 tax-free. By maximizing this annual allowance, you can efficiently transfer assets to loved ones and reduce your taxable estate over time.

If the total value of gifts to a single recipient exceeds the $17,000 limit, the donor will need to file a gift tax return and potentially pay gift tax on the excess value. These steps can be easily avoided by keeping gifts under the maximum of $17,000 per recipient.

When is the deadline for tax-free gifting?

It is important to note that the annual exclusion is just that – annual. For a gift to count towards your 2023 annual exclusion amount, it must be completed by the year’s end. The recipient must deposit their gift no later than December 31, 2023; any later and the gift will count towards the 2024 annual exclusion instead. Thus, it is important to consider the time a transaction or deposit will take to clear when making year-end gifts.

Come January 1, 2024, your annual exclusion allowance will reset, freeing you to accomplish even more tax-free gifting. The IRS has recently announced that 2024’s annual exclusion amount will be $18,000 per recipient. The lifetime exemption limit will also increase to $13.61 million per person. We encourage our clients who gift regularly to keep a record of their annual exclusion gifts each year and file it with their estate planning documents.

Charitable Gifting

Make a meaningful impact on causes you care about by incorporating charitable gifts into your estate planning. Charitable contributions not only benefit the organizations you support but also provide potential income tax deductions. Like annual exclusion gifting, it is integral that any charitable gifts be made by December 31, 2023 to ensure that they are counted against your 2023 taxes.

Charitable giving may offer advantages on both your state and federal income taxes. Qualifying charitable contributions may entitle Massachusetts taxpayers to a state income tax deduction. When claimed, this deduction is applied against the taxpayer’s Massachusetts Part B adjusted gross income. Both residents and non-residents filing in Massachusetts are eligible for this charitable deduction. Charitable income tax deductions may also be available for federal taxpayers, but only for those who choose to itemize.

What are some methods of charitable gifting?

There are several avenues by while charitable contributions can be made. Each offers its own advantages and contributes differently to one’s estate plan; consult with your attorney or tax preparer to determine the best options for you.

  • Direct monetary donation – Support a cause you care about directly by making a tax-free monetary gift by cash or check to the qualified charitable organization of your choice.
  • Donor-advised funds (DAFs) – Contributing to a donor-advised fund allows you to provide long-term support to charities while maximizing your charitable contribution deduction in the process.
  • IRA distributions – Retirement account owners aged 72 and older are mandated to withdraw a required minimum distribution (RMD) from their account each year. A qualified charitable distribution (QCD) can fulfill this RMD, satisfying withdrawal requirements without incurring any taxes.

I hope you can take advantage of these gifts before year end!

Thank you for continuing to choose Eckert Byrne LLC as your trusted partner in estate planning. We wish you a safe and joyful holiday season and look forward to reconnecting in the new year!

Warm regards,

Anna E. Byrne