Are you looking for new ways to save on potential estate and gift taxes? The solution might be easier than you think: giving away more money to loved ones. Particularly in the case of a 529 plan, you may be able to fund education and leverage the 5-year gift tax exclusion all in one fell swoop.
How does the gift tax exclusion work and how does it benefit your bottom line? Get the details on reducing tax liability by leveraging tax-advantaged accounts for your loved ones here.
What is the Gift Tax?
For many people trying to lower their estate tax liability, giving money away is a viable option that benefits you and your loved ones. Since giving away that money removes it from your taxable estate, it can be a win-win for individuals with excess assets.
The IRS has some pretty flexible rules when it comes to giving cash to friends and family. In 2024, you can give up to $18,000 per person before you need to report the gift. This annual exclusion amount tends to go up each year to adjust for inflation. It’s important to note that this amount is per individual, so married couples can essentially double that amount if both partners give to the same person.
If you give someone more than the annual exclusion amount, you will need to disclose the gift by filing IRS Form 709.
There’s also a lifetime exemption amount of $13,610,000. That means you will need to give above and beyond your annual exclusion to the tune of more than $13M before you tap out the gift tax. Currently, this is scheduled to sunset at the end of 2025.
Financial generosity could be a savvy move for your portfolio and savings account. Giving money can reduce overall tax liability and cut back on the amount you give to the government at the end of the fiscal year.
Plus, you get the experience of being generous and helping a loved one – a major benefit for all involved.
The 5-Year Gift Tax Exclusion
The incentive for giving might be enough to make you up the ante on your giving this year. Even more than that, a 5-year election allows you to give the maximum annual exclusion gift for the next five years – all in one lump sum. This is applicable only if you want to give to a 529 plan which helps students pay for tuition and school expenses.
If you had a particularly profitable year and need to minimize your tax liability, giving more to the next generation could be a strong and sensible move.
Let’s say that your grandchild is nearing high school and their parents have started to talk about how to afford higher education upon graduation. You may feel moved to help out and can give a lump sum now so that the money can grow in a 529 plan.
Given that the annual gift tax exclusion for 2024 is $18,000 and the 5-year gift tax exclusion allows you to give 5 years all at once, you could give up to $90,000 in gifts as an individual (or double that if you are married).
Keep in mind that whatever you give above the annual exclusion will be parsed out equally over the next five years. This means that giving $50,000 essentially shows at $10,000 each year so you can still contribute more the following year if desired. You must report it on Form 709 for the next five years.
The benefits of giving to a tax-deferred account like a 529 plan extend to both the giver and the recipient. As the giver, you contribute money with your before-tax dollars. Recipients can pull the money from the 529 plan tax-deferred (provided that the money is used for qualifying educational expenses). Some states even allow a tax deduction for contributions to the in-state 529 plan.
And if they do not use the entire balance for school, they can later roll it into a Roth IRA.
Other Expenses Excluded from the Gift Tax
While the most talked about benefit of the 5-year gift tax exclusion applies to a 529 account, it is not the only expense that is excluded from the gift tax. Here are three other scenarios you might want to take advantage of to lower your overall tax liability.
Educational Expenses
If you waited too late to open a 529 plan for a child who is already in college, then you may want to help cover their tuition expenses instead. Any payments made directly to the bursar will exclude you from having to file gift tax returns.
Keep in mind that this does not apply to other expenses like books, supplies, or room and board. To give toward these items in a tax-friendly way, you should write a personal check to the student (which falls under the gift tax) and allow them to make their payments as they see fit.
Gifts to a Spouse
Not every couple shares their finances. If you want to help your spouse pay for something or give them the freedom to splurge on something they ordinarily would not, you can give unlimited gifts to a spouse without having to file gift tax returns.
The only stipulation is that your spouse must be a United States citizen.
Medical Expenses
There is no doubt about it: medical expenses can add up in a hurry. Gifts aimed at helping another person conquer their medical debt are also excluded from the need to file gift tax returns. The only catch is that you must write the check directly to the medical service provider.
Plan Your Gifts with Confidence
When it comes to crafting a strategic, impactful financial strategy, planning ahead is one of the most important factors. Understanding the limits of the gift tax and deliberately choosing the best time to take advantage of the 5-year exclusion can help ensure you and your loved ones get the best value from your gift.
Magellan provides comprehensive estate, financial, legal, and tax planning services for our clients. We can take a holistic look at your portfolio and advise you on the best path forward based on your goals, whether that’s gifting money to a loved one or establishing a charitable remainder trust, a tax-exempt entity that can provide payments to beneficiaries for years to come.
Contact us today to learn more about our services and start to prepare for your financial future!
For a comprehensive review of your personal situation, always consult with a tax advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.