Maximizing Lifetime Gifting: Paying Gift Tax and Advanced Strategies

Taxpayers Face Dilemma as Lifetime Estate and Gift Tax Exemption Nears End

With less than two years left in the increased lifetime estate and gift tax exemption environment, many taxpayers are finding themselves in a challenging position. Since the implementation of the Tax Cuts and Jobs Act (TCJA), a significant number of taxpayers have taken advantage of the increased exemption, leading some to exhaust their available exemption amount.

The current lifetime estate and gift tax exemption stands at $13,610,000 for the year 2024, with an increase from $12,920,000 in the previous year. While this increase may seem substantial, many taxpayers are eager to make more gifts but are hesitant to pay gift tax. However, there are benefits to paying gift tax, including the removal of appreciation from the taxable estate, the reduction of the estate tax base, and providing an income tax benefit to the donees who receive the gift.

Understanding how the gift and estate tax work together is crucial in making informed decisions. Lifetime gifts are included in the tax base on the estate tax return, but they help remove appreciation from the estate, ultimately reducing future gift and estate taxation. Paying gift tax on lifetime transfers can be a tax-efficient strategy, as it allows for the removal of appreciation from the donor’s estate and provides income tax benefits to the beneficiaries.

Two hypothetical taxpayers, TP 1 and TP 2, illustrate the impact of different gifting strategies on their estates. TP 1, who does not want to pay gift tax, ends up with a higher estate tax bill compared to TP 2, who chooses to pay gift tax on lifetime transfers. TP 2’s estate tax bill is significantly lower, and the beneficiaries receive a higher net value due to the payment of gift tax.

In addition to the tax benefits, paying gift tax can result in an income tax benefit for the beneficiaries. The adjustment to the income basis of the property received by the donee can reduce their income tax liability when the assets are sold.

As the deadline for the increased exemption approaches, taxpayers are encouraged to explore advanced gifting strategies, maximize the use of annual exclusions, and consider paying gift tax on lifetime transfers. Proper planning and understanding of the tax implications can help taxpayers make the most of their gifting opportunities before the exemption reverts to previous levels.