This Halloween, I’m Dressing Up as a Gift Tax Return
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By Ben Dolan, CFP®
My kids are obsessed with Halloween! All Summer long they devise costume plans which inevitably changes 5 to 6 times prior to October 31st. Our neighborhood is not great for trick-or-treating, but the one next to ours (where we lived while renovating our current home) is perfect. It’s safe, there’s a costume parade, and the houses are close together, which means the step-taken-per-candy-received ratio is fantastic (do ya’ll not calculate this?)!
Giving gifts of candy to little ones doesn’t have a tax cost, and you don’t have to report it to the IRS. In fact, in 2024, you could give each of those trick-or-treater’s $18,000 in cash and you wouldn’t have to report it to the IRS (if you are inclined to do this, please email me your address and I’ll bring my kids over). This is due to the IRS annual exclusion. In short, the IRS is not interested in gifts below a certain level, but has a system of record, known as Form of 709, for gifts above $18,000 from one individual to another individual.
The IRS adjusts the annual exclusion on a somewhat frequent basis (note, from 2018 to 2021 the annual exclusion was steady, at $15,000, then adjusted by $1,000 each year from 2022 to 2024). While not official yet, many believe the exclusion will rise to $19,000 in 2025.
When gifting large sums, paying attention to the annual exclusion can save you administrative headaches and fees. Note, if you make a gift valued > $18,000 to one individual in 2024, you’ll have to file a gift tax return Form 709. The amount gifted above the annual exclusion will offset your lifetime giving allowance (currently $13.61 million per person).
It’s not uncommon for our clients to gift to children and grandchildren to help celebrate milestones, teach them about investing for the future, or give them a leg up with their first home, all while reducing the size of their estate. Depending on the type of gift, going above the annual exclusion and filing Form 709 may not be necessary.
For example, let’s assume Bob and Mary are interested in helping their newly married son and his wife with a down payment for a new home next year. Bob and Mary have done well, and would like to give $100,000, but don’t want to pay a CPA $1,500 to complete a gift tax return. How might they accomplish this.
To start, each of them can give $18,000 to their son, AND $18,000 to their son’s new wife, in December of 2024:
Bob = $18,000 to son, $18,000 to son’s wife = $36,000
Mary = $18,000 to son, $18,000 to son’s wife = $36,000
This makes total gifts in 2024 of $72,000 without going over the annual exclusion. In January of 2025, assuming no change to the annual exclusion amount, Bob can give $18,000 to his son and Mary $10,000 to her son, bringing the gift total to their target of $100,000.
Note, based on how the gifts were spread out, Bob and Mary 1) do not have to report the gifts to the IRS, 2) used $0 of their lifetime exclusion amount, 3) reduced the size of their estate, and 4) avoided the cost and time associated with Form 709.
Gifting, when done properly, doesn’t have to be a costly nightmare!
Happy Halloween!
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Ben Dolan and Michael Foster are investment advisor representatives of Dolan Capital Advisors, Inc., a SEC-registered investment adviser. Investment advice offered through Dolan Capital Advisors, Inc.