As the end of the calendar year approaches, it’s easy to get swept away in the crush of family gatherings, holiday lights, and rich desserts. But there is one more thing you should add to your already full to-do list — gift giving.
You are probably thinking that you already have that covered, but if you want to minimize your taxable estate, you might have more to do. Gifting is the easiest estate planning trick for passing wealth on to the next generation without paying taxes.
In 2018, an individual can gift $15,000 per person to as many people as they like tax free. This is known as the annual gift tax exclusion. Couples can double up on this and gift $30,000 tax free. This amount resets each year, so if gifting is part of your estate tax minimization plan, it is important to make all your gifts before the end of the calendar year.
Thinking about giving someone a gift worth more than $15,000? Say tuition money, a new car, or a downpayment on a new home? You’ve got a couple of options. Your first option is to give the gift, and then file a gift tax return and pay taxes on the amount in excess of $15,000. Your second option is to dip into your lifetime estate and gift tax exemption. This will prevent you from owing a tax on the gift this year, but it could mean you pay more in estate taxes at your death.
Your lifetime estate and gift tax exemption is the total amount you can pass on without paying a tax on it. In 2018, the exemption is capped at $5.6 million per individual. Like the annual gift tax exclusion, this amount can be doubled by couples, who together can pass $11.2 million tax free. You get to choose whether to use up your exemption while you are alive, or hold on to it until you pass away and use it to minimize your estate taxes.
The lifetime gift and estate tax exemption is a hard cap, though it is indexed to inflation, so it will rise over time. The best way to give more than $5.6 million tax free is to start using up your annual gift tax exclusion each year. Consistently gifting can significantly increase the amount of money you end up passing to others without paying taxes on it. $15,000 may not seem like a lot, but it starts to add up when you gift to multiple people each year.
Using up your annual gift tax exclusion is also a good idea since you never know when Congress will decide to tinker with the tax laws and increase estate tax rates or decrease the amount of the lifetime exemption. Gifting while you are alive decreases this uncertainty and allows you to enjoy watching your loved ones use what you have given to them.
If you want to start thinking about how to lower your future estate tax burden, our firm is ready to help. Give yourself a gift and call our office in Houston to schedule an initial consultation.