Family Finances: Year-End Gifts Reap Benefits for Donors and Recipients

(Dreamstime/TNS)

By Joy Taylor From Kiplinger’s Personal Finance

Financial planners and tax professionals often advise clients to include gifting in their year-end tax planning strategies. There are three main reasons to do this.

First, your gifts can help family members and friends. Second, because gifts aren’t subject to income tax, the recipient isn’t taxed on the amount received. Third, it’s unlikely you will owe federal gift taxes because of the currently high lifetime federal gift-and-estate-tax exemption.

For people who die in 2022, this exemption is $12,060,000. And in 2023 it increases to $12,920,000. This amount is slated to drop to about $5.5 million after 2025 unless Congress extends it. But most gifts you make now won’t trigger post-2025 estate tax bills.

Make full use of your annual gift tax exclusion. You can give up to $16,000 to each child, grandchild, or any other person in 2022 without having to file a gift tax return, pay gift tax or reduce your lifetime estate-and-gift-tax exemption. For example, if you are married with two children and five grandchildren, you and your spouse can each give up to $16,000 in 2022 to each of your seven relatives without gift tax consequences.

Help pay for education. Grandparents can open 529 college savings accounts for their grandchildren or others and fund the accounts with a very generous gift. You can contribute up to five years’ worth of excludable gifts to a 529 account without gift-tax consequences.

For 2022, you can shelter from gift tax up to $80,000 in contributions per account ($160,000 if your spouse agrees). If you put in the maximum, you will be treated as giving $16,000 (or $32,000) to that beneficiary in 2022 and in each of 2023 through 2026.

Or you can pay tuition directly to the school for anyone currently enrolled. There are many tax advantages to doing this. There is an unlimited gift-tax exclusion for these types of direct tuition payments. The amount is nontaxable to the student. It doesn’t count against the $16,000 gift-tax exclusion or your lifetime estate-and-gift-tax exemption.

Consider intra-family loans. Some parents or grandparents may not want to make an outright gift to their child or grandchild. But they may feel better about loaning money to their kin. The interest rate on loans over $10,000 must equal or exceed the IRS’s set interest rate for the month in which the loan is made, which was 3.88 percent for long-term loans in November.

The IRS pays close attention to loans between family members and may seek to recharacterize certain loans as disguised gifts if you’re ever audited. Proof of a loan includes a written debt instrument with interest, a fixed repayment schedule, collateral and a reasonable expectation that the amount would be repaid.

People who previously made a loan to their child or grandkid might think about forgiving all or a portion of the debt. Although most forgiven debt is subject to federal income tax, this rule does not apply to forgiven gift loans. You can forgive up to $16,000 of the loan per year ($32,000 if your spouse agrees) without having to file a gift tax return or reduce your lifetime estate and gift tax exemption. Of course, you can always forgive more.

(Joy Taylor is editor of The Kiplinger Tax Letter. For more on this and similar money topics, visit Kiplinger.com.)

©2022 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.

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