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Understanding the Federal Gift Tax

Understanding the Federal Gift Tax

February 28, 2024

For many hopeful homebuyers, support from parents and relatives is the key to pursuing their dreams. According to one recent survey, nearly six in every ten parents provide financial assistance to their children who are Millennials or Gen Z.1 Because the housing market is heading for new highs in many parts of the country, some parents may be inclined to provide assistance. But what about the federal gift tax? Could a down payment or other assistance come with a tax bill from the IRS? Here are a few details about the gift tax. This information may help you give gifts more mindfully about any potential tax consequences.

What is the Gift Tax?

The federal gift tax assessment is for large gifts of money or property. However, some considerable gifts aren't subject to the gift tax. Gift givers may take advantage of the annual exclusion each year and potentially avoid paying any taxes on gifts for amounts below the exclusion. For 2024, the gift tax exclusion is $18,000 per person per year.2

The $18,000 limit is an individual one, meaning per parent and per child. In other words, a married couple may gift their son $36,000 ($18,000 from each parent) and their daughter-in-law $36,000 ($18,000 from each step-parent) for a total of $72,000 without owing any gift tax. This limit resets each year. This couple could potentially make a $72,000 gift on December 31 in one year and then gift another $72,000 on January 1 of the next year without paying any gift tax.

In addition to the $18,000 annual exclusion, there's a lifetime cap on tax-free gifts. However, unless you're a very generous gift-giving multimillionaire, you're unlikely to hit this cap, which is currently $13.61 million for 2024.3

What is a Gift?

The definition of "gift" under the gift tax law may be more expansive than you might expect. Generally, a gift is any transfer of property under its fair market value. This transaction may include selling a property to a family member at a lower cost or loaning a large amount of money at less than the market interest rate.

There are also some financial transactions that aren't considered gifts. Gifts to a spouse aren't subject to the $18,000 annual exclusion, nor are charitable gifts or gifts for medical or educational expenses.

Are There Financial Benefits to Gifting?

Giving generous financial gifts may lower your total assets, lowering your estate tax liability. This effect may be beneficial if you're gifting an asset that may significantly appreciate before you die, such as real estate.

Gifting an income-producing asset, such as a rental property or certain royalties, to a loved one may also lower your income taxes. If the person receiving the gift is in a lower tax bracket than you are, they may pay any future taxes on this asset at a lower rate.

Finally, giving your loved ones financial gifts may encourage them to participate actively in their financial future. These gifts might encourage your loved ones to learn more about investing or even make their own gifts.

Footnotes

1 The Bank of Mom and Dad Is Still Open: Survey Reveals Millennials and Gen Zers Are Looking For Advice and Financial Assistance From Parents https://www.prnewswire.com/news-releases/the-bank-of-mom-and-dad-is-still-open-survey-reveals-millennials-and-gen-zers-are-looking-for-advice-and-financial-assistance-from-parents-301001274.html

2 What is the Gift Tax Exclusion for 2024? https://www.kiplinger.com/taxes/gift-tax-exclusion

3 Gift Tax: How It Works, Who Pays and Rates https://www.nerdwallet.com/article/taxes/gift-tax-rate


Important Disclosures

Content in this material is for educational and general information only and not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by WriterAccess.

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