Federal Gift Tax Laws and Exemptions
For Federal gift tax purposes, there are two types of gift tax exemptions.
The annual gift tax exclusion amount is the amount you can gift per individual and not be subject to Federal gift taxes nor be required to file a Federal gift tax return. The annual gift tax exclusion is per recipient, meaning that one can make numerous gifts to different individuals and so long as the amount given to each individual is below the annual gift tax exclusion amount, then no gift tax will be owed. For 2024, the Federal annual gift tax exclusion amount is $18,000. Caution: If you are considering making gifts for Medicaid and nursing home eligibility purposes, be sure to read Gift Tax Trap #1 below.
The lifetime gift tax exclusion amount is the cumulative amount of gifts an individual can make during their lifetime above and beyond the annual gift tax exclusion amount and still not owe any gift tax, though a gift tax return must be filed. This exemption is specific to the giver and is NOT per recipient. For 2024, the Federal lifetime gift tax exclusion amount is $13.61 million per person. Any gifts made in excess of the lifetime gift tax exclusion amount will be taxed at a 40% tax rate. (Be sure to read below for how the lifetime gift tax exclusion interacts with your Federal estate tax exclusion.)
Think of the lifetime gift tax exclusion amount like a gift card. If you make a gift in excess of the annual gift tax exclusion amount, you’ll be required to file a Federal gift tax return using IRS Form 709. You can then “cash in” your gift card to offset any taxes that would have been owed on gifts made up to the cumulative lifetime gift tax exclusion amount.
North Carolina Gift Tax Law and Exemptions
North Carolina has repealed its gift tax for gifts made on or after January 1, 2009.
Who Pays Gift Tax?
If any gifts are made in excess of the annual gift tax exclusion amount, then the gift giver must file a Federal gift tax return (IRS Form 709). If any gift taxes are owed, they are paid by the gift giver not the gift recipient and under the Federal income tax code, gifts do not constitute income and therefore are not a taxable event for the gift recipient.
Using Federal Lifetime Gift Tax Exclusion Reduces Federal Estate Tax Exclusion
Keep in mind that the Estate Tax Exemption and the Lifetime Gift Tax Exemption are linked together. Any portion of your Federal Lifetime Gift Tax Exemption used will reduce your available Federal Estate Tax Exemption upon death. For example, if you use $2M of your Federal lifetime gift tax exclusion during your lifetime, then upon death your Federal estate tax exemption amount will be reduced by $2M.
Common Gift Tax Traps
Below, we address how the gift tax rules work and the current exemptions. However, I want to caution you to first ask yourself what your objective is in making gifts. Sometimes well-meaning professionals, family members, and friends provide advice without being aware of the whole picture, including your unique circumstances and your overall estate. There are a few common traps that we see people fall into:
Gift Tax Trap #1: Future Nursing Home Care & Medicaid Eligibility
Just because the IRS allows you to make a gift, does NOT mean that Medicaid will allow the gift. Thus, if you are concerned about the possibility of future nursing home costs, you should consult with an elder law attorney before making major gifts. For Medicaid eligibility of help with nursing home bills, there are significant penalties for gifts made within 5 years of needing nursing home care. To read more, check out The Ultimate Guide to Paying for Nursing Home Care in North Carolina.
Gift Tax Trap #2: Outdated Tax Planning Advice
We still frequently meet with people that are working off of outdated advice. A long time ago their tax preparer advised them to make annual gifts to their family members in order to reduce the overall size of their estate and minimize potential estate taxes upon their death. The reality is that for many, this is no longer necessary (see below) and potentially can backfire dramatically if you eventually need nursing home care (see trap #1 above).
Gift Tax Trap #3: Liquidating Appreciated Assets
If part of the process of making your gift involves liquidating an asset that has significantly increased in value since you purchased it--for example, a house or a stock portfolio--you may be subjecting yourself to capital gains taxes that could be avoided if the property conveyed through your estate planning instead.
Need to Discuss Your Tax & Asset Protection Planning?
In our years of experience working with thousands of individuals in the Wake County area, we find that asset protection planning is particularly important if any of the following apply:
- You own a home and have an estimated net worth of $1M or more;
- You own vacation property;
- You own rental property;
- You are high income-earning professionals;
- You are high income-earning business owners;
- You own a business with significant value.
Don’t leave yourself or your loved ones stuck dealing with the financial aftermath of avoidable taxes, a lawsuit, long-term care costs, or an unexpected tragedy can bring to your family. Contact Carolina Family Estate Planning today at (919) 443-3035 or fill out our online form to speak with someone about registering for a seminar or a Vision Meeting. You may also wish to request a free copy of Jackie Bedard’s book, Estate Planning Pitfalls: The Twelve Most Common Threats To Your Estate & Your Family’s Future.