Though the terms and overall process can seem overwhelming, gifting remains a fantastic opportunity to assist your loved ones financially. As we close out one year and welcome another, the desire to give that comes along with the Christmas season raises questions regarding gifting for many families and individuals.
The bottom line? Gifting is a fantastic option for many people. Before you jump into it, you'll want to ensure that you completely understand your reasons for gifting, that it fully aligns with your personal values and your gifting limits, whether transferring wealth from one generation to the next or helping out financially.
Developing a strategy can feel like a lot when you've decided to gift, especially concerning gifting limits, how much, and when to give. Gifting, when done correctly, can be a fantastic way to prepare your loved ones to maintain expenses and finances in the future.
The Importance of Gifting
Gifting regularly is a responsible and effective way to prepare your beneficiaries for receiving more significant amounts of money. For example, say you have an asset, such as a vacation home or cabin, that you'd like to leave your children. Beginning the gifting process with smaller amounts of money before the property officially becomes theirs will help them manage the expenses with financial care and ease.
With professional assistance, you can devise a gifting plan that will work for you, understanding your motivations and setting realistic expectations for those receiving the gift. Let's talk a bit about your options.
Before gifting, you'll want to ensure that you're within the gifting limits allowed by law. In 2021, financial gifts were allowed (per person, per spouse) of up to $15,000, and in 2022, this amount will increase to $16,000.
The IRS set an amount for an annual gift tax exclusion every year, and for 2022, they've set the bar at $12.06 million. However, you can gift up to $16,000 yearly without counting against your lifetime exclusion amount.
So, if you have a substantial amount of money to gift, and you'd like to equip those receiving the gift for that financial responsibility in the future, you can gift them smaller amounts to prepare them accordingly.
Generally, your property basis is the amount of capital investment in your property for tax purposes. In short, the basis of an asset is how much it costs you, as in the original value or purchase price.
When you gift finances or assets, your basis becomes the basis for those receiving the gift. The only time the basis is not the same for the gift receiver is when your original purchase or investment has depreciated to below fair market value. This rule applies most often to gifted stock.
Gifting and Tax Deductions
There are plenty of misconceptions circulating regarding gifting, the most prevalent being that a gift is tax-deductible. In reality, financial gifts are not tax-deductible, and it's crucial for those considering gifting to have that information from the beginning.
In addition, depending on the amount of money that you are gifting, you might have to pay a federal gift tax. However, this gift tax does not apply to annual gifts under $16,000 beginning January 1st, 2022.
The only time gifts are tax-deductible is when made to a charitable organization and business gifts. The IRS classifies a business gift as any gift given that pertains to your business or trade. There are dozens of regulations that come with business gifts, so it's essential to seek the assistance of a professional financial wealth advisor to ensure that you're not in violation of said regulations.
Regular Gifting and Your Beneficiaries
Though we briefly touched on how regular gifting prepares your beneficiaries to receive large amounts of money, there are other reasons that you might consider giving recurring gifts before the total amount of assets is inherited.
For starters, you'll get to watch your beneficiaries enjoy your gifts within your lifetime. This perk is a major one for many people who gift, as it's emotionally rewarding to watch those you love relish your gift while learning invaluable responsibility. Regular gifts, over time, teach the importance of financial stability and proper management.
Also, annual gifts within the gift tax exclusion limits reduce the size of your estate. This size reduction may potentially reduce the estate tax liability for your heirs. If you choose to gift above the annual exclusion amount of $16,000 per person for 2022, you must file a gift tax return. However, these gifts will count toward your estate tax exemption amount. Your estate tax exemption has a limit, and once you cross the limit line, any further gifts face a forty percent tax.
The Season for Giving
It's undeniable that Christmas is the season to give, which gets the wheels turning regarding financial assets and gifting for many people. In most cases, annual gifting is essential to ready your beneficiaries for the responsibility of caring for your estate.
Consider the components of financial and property inheritance. When it comes to factors like the estate tax, gifting before your death can reduce stress for your loved ones during an already stressful time.
There is no better time of year to evaluate your options for gift giving. You can formulate an effective plan for regular gifting to your beneficiaries now, and we can't think of a more celebratory way to bring in the New Year.