Barry Dolowich, Tax Tips: How taxes on gifts work

Q. My wife and I want to begin a gift-giving program for the benefit of our children and grandchildren. My understanding is that our estate can save estate taxes by making these gifts before we die, but we do not want to create tax problems for the kids. Can you please explain how this all works?

A. The Internal Revenue Code requires an estate tax return to be filed when the 2022 gross estate has a value exceeding $12,060,000 per individual and the estate tax rates for estates valued over this amount is 40%. For gift tax purposes, the lifetime gift exemption amount is also $12,060,000 per person.

Giving a gift to a relative or friend can get you a gift in return from Uncle Sam — in the form of future tax savings. By gifting your assets, you will no longer have to pay income taxes on the earnings from those assets, and you will be lowering your estate’s gross value. Gifts are, in fact, a classic and very effective strategy for lowering your tax burden. The annual gift tax exclusion for 2022 allows you to give $16,000 per year (up from $15,000 in 2021) to each of an unlimited number of recipients (or up to $32,000 if you were married and your spouse joined in the gift). Gifts over $16,000 require the filing of a gift tax return. Generally, however, no tax is paid, because the gift is offset by a portion of the lifetime gift exemption. My advice is to start gift-giving early and keep the values at or below the annual gift tax exclusion amounts to avoid using up some of your lifetime gift exemption.

Any asset can qualify as a gift, not just cash. Special care and planning must be given to situations where appreciated assets (stocks, bonds, real estate, etc.) are going to be gifted. Beware — the tax basis of the appreciated asset gifted is the same for the recipient as the donor.

Regardless of the amount, a cash gift by you is never taxable income to the recipient. However, any future earnings derived from the investment of the gift proceeds may be taxable.

For those that own family businesses or substantially appreciated property, there are many esoteric strategies available to reduce estate and income taxes by carefully timing transfers of business interests, utilizing various trust entities or by making charitable contributions.

Gifting assets is just one of the many strategies used in estate and income tax planning. I strongly recommend that you consult with your tax professional to help develop a well-rounded estate planning strategy specific to your situation.

Barry Dolowich is a certified public accountant and owner of a full-service accounting and tax practice with offices in Monterey. He can be reached at 372-7200. Please address any questions to Barry at PO Box 710 Monterey, CA 93942-0710 or email: bdolowich@gmail.com.

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