#18 | Your Annual Gift Tax Exclusion

The Annual Gift Tax exclusion amount is increasing from $16,000 to $17,000 in 2023.   Today, Bruce and Jon explain the importance of this, and why these rules can have significant financial ramifications for years to come – not just for you, but for your heirs as well.

If you exceed the annual gift tax amount, you’ll need to file a gift tax return – paperwork that will also need to be retained for quite some time.   But as long as you stay within these limits, you can whittle down the amount left to your heirs, potentially reducing or even eliminating estate taxes, depending on your individual situation.

Right now, the threshold for estate tax exemption is very high – nearly $26 million for a married couple.  But that rule is scheduled to sunset in 2025, likely returning to only $5 or $6 million.

Bruce walks us through the different dollar limits, and what you can do now to protect yourself, your money, and your family.

For more information about anything related to your finances, contact Bruce Hosler and the team at Hosler Wealth Management.

Call the Prescott office at (928) 778-7666 or our Scottsdale office at (480) 994-7342.

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Podcast Host

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Bruce Hosler is the founder and principal of Hosler Wealth Management, LLC., which has offices in Prescott and Scottsdale, Arizona. As an Enrolled Agent, CERTIFIED FINANCIAL PLANNER™ professional, and Certified Private Wealth Advisor (CPWA®), Bruce brings a multifaceted approach to advanced financial and tax planning. He is recognized as a prominent financial professional with over 27 years of experience and a seven-time consecutive *Forbes Best-In-State Wealth Advisor in Arizona. Bruce recently authored the book MOVING TO TAX-FREE™ Strategies For Creating Tax-Free Retirement Income And Tax-Free Lifetime Legacy Income For Your Children. www.movingtotaxfree.com.

In the Protecting & Preserving Wealth podcast, Bruce and his guests discuss current financial topics and provide timely answers for our listeners.
If you have a topic of interest, please let us know by emailing info@hoslerwm.com. We welcome your suggestions.

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Jon “Jag” Gay: Welcome to episode 18 of Protecting and Preserving Wealth. I’m Jon Jag Gay, along with Bruce Hosler of Hosler Wealth Management. Bruce, we’re talking about giving money away today.

Bruce Hosler: Yes, we are. We’re talking about the annual gift tax exclusion amount,

Jon: So, the annual gift tax exclusion amount Bruce, I’ve heard of it before. I’m not quite sure what it is and what it means to our listeners.

Bruce: Jon, every year the government will allow you as a tax payer, to give away a set amount of money without having to report it. Now, without having to report it, what does that mean? It means without having to file a gift tax return.

Jon: Okay. Now I’m starting to remember some of this now, so this has to do with, uh, income tax, right?

Bruce: No.

Jon: Oh, okay.

Bruce: These rules are set around gift tax and the estate or death tax. It has to do with how much money will be included in your estate when you die, and if it will be subject to a death tax when you die.

Jon: Oh, okay, so it’s a state tax that we’re worried about with these annual gift limits?

Bruce: Yes and no.

Jon: Okay.

Bruce: The tax that we’re worried about is ultimately a state tax, but annually the rules that we’re worried about are gift tax filing limits for each tax year. We’re trying to help our listeners avoid having to needlessly be required. To file a gift tax return and pay their tax professional to prepare that gift tax return.

Jon: Ah, fair point. So, if you give away too much money in any given year, you might have to file a gift tax return on that amount.

Bruce: That’s exactly right, Jon. And that’s what we want to help our listeners avoid if we can help them learn the rules in this area and plan accordingly.

Jon: All right, so, question here, Bruce. Say, my parents wanted to help out, my wife and I, they give us some money to help out. Do I have to pay income tax on that gift from my parents?

Bruce: Jon, that’s a great question, and I get that frequently, we hear that from our clients. Do the recipients of gifts have to pay income tax on the amount they’re receiving? And the answer is – No.

Jon: Okay, so what about the other side of that? Say my folks in that situation, would they have to pay some sort of income tax on the gift they made to us or some gift tax they have to pay when they give a larger gift?

Bruce: Perhaps you’ve heard of the lifetime estate and gift tax exemption amount, also known as the Unified Credit. In 2023, that amount will be increasing to 12.92 million per person; that your parents can leave you a total of 25.8 million when they die. And you and your siblings will not have to pay any estate tax on the pile of money they leave you if it is less than that exemption amount.

Jon: Okay, I hear what you’re saying about the estate tax exemption amount, but what does that have to do with the annual gift tax exemption amount?

Bruce: Imagine if you and your wife had an estate worth 30 million dollars when you die. Your kids will be taxed at a rate of 40 cents on every dollar over the exemption amount of 25.8 million. So, potentially when you die, your kids would have to pay 40% on the 4 million of your estate over the exemption amount. That would be an estate tax of around 1.6 million.

Jon: Okay, yeah, that’s a pretty high tax rate.

Bruce: Yes, it is. And here’s the rub. The high exemption amount that we now have is due to sunset in 2025, and it’s going to lower back down to 5 million dollars adjusted for inflation. Which many people expect to be about 6 million. So, in 2026, a lot more people may have an estate where 6 million and the 40% tax rate is applicable for every dollar above the 6 million.

So, there’s gonna be a lot more Americans that are gonna be subject to estate tax.

Jon: That’s a really good point, Bruce, because I think about you have some of these high numbers and you might have listeners think, oh, I’ll never be near that number. When you start talking about inflation and the dollar, dollar number is going up on everything, you might be closer to that number than you realize. So…

Bruce: Exactly..

Jon: What can people do to prepare for the future lower estate tax exemption amount?

Bruce: Well, just like we’ve been discussing, if your parents want to give some money away to lower their potential future estate value, they can give some money to you and to your wife each year to help you out and to try and remove those funds from their estate.

Jon: All right, I’m beginning to understand this now. I think, I remember hearing about an annual gift tax exclusion amount. What is that and how does it work?

Bruce: Every individual can make a gift not to exceed the annual gift tax exclusion amount to as many other individuals as they desire, and they will not have to file a gift tax return.

Those funds will be removed from their taxable estate, thus allowing them to begin lowering their taxable estate by giving money away to their children and their loved ones.

Jon: That means my parents can give a gift to me and to my wife as well?

Bruce: This is where our listeners can get into trouble. The gifts are individual.

Let me illustrate. Your father can give you a gift. Then your father can give your wife a gift as well. Two individual gifts were made. One to you, one to your spouse. Your mother as well can give a gift to you and one to your wife.

Jon: Why can’t they just write one check for the full amount payable to me as their son from both of them?

Bruce: That is what we need to point out to our listeners, Jon. That would be a gift-splitting example, and that’s what we want our listeners to absolutely avoid because the tax laws will require your parents to file a gift tax return if they gift split, no matter the size of the gift, if a couple gift-splits, they’re required to file a 709 gift tax return.

And that’s what I want our listeners to avoid.

Jon: You wanna avoid all those forms with numbers on them or as many of them as you possibly can?

Bruce: Yes.

Jon: How do they avoid that?

Bruce: By making individual gifts in amount that are below the annual gift tax exemption amount.

Jon: So, what is the annual gift tax exemption amount?

Bruce: That is one of the things that I want to point out to all of our listeners. In 2023, the new annual gift tax exemption amount has been increased up to $17,000 per person for 2023. In 2022, it was only $16,000 per person.

Jon: So, my parents can make larger gifts to my wife and I and not have to file a gift tax return.

Bruce: That’s exactly what we want all of our listeners to be aware of, the new annual gifting amount.

Jon: Okay, so, what if someone blows it and they end up giving too large of a gift, or they write one check and gift-split, what happens at that point?

Bruce: They will have to prepare and file a 709 gift tax return and they’ll have to keep it available for the rest of their lives.

There’s no statute of limitations. They have to keep that in their files and active.

Jon: Okay, I gotcha. So does anyone have to pay a tax or pay a penalty when that happens?

Bruce: Nope. There are no taxes or penalties. But they have to be very careful going forward to keep that gift tax return and then have their children have access to it when they die.

So, a 706 estate tax return can be properly filed, including those gift amounts if they’re required, or choose to file a 706 estate tax return to avoid unnecessary estate taxes.

Jon: Bruce, this is beginning to sound like a lot of hassle. They’ll file these gift tax returns and keep them forever.

Bruce: It is a lot of hassle and that’s why I’m trying to warn our listeners to avoid this whole mess by staying aware of the gift tax exemption amount and the rules associated with making gifts, and to make them individually.

Jon: This is why this stuff really is so important. I’m glad we covered it today, Bruce, if our listeners have questions about making gifts and gift tax returns, what’s the best way to reach you and your team at Hosler Wealth Management?

Bruce: They can reach us at the website at https://hoslerwm.com. hoslerwm.com. Or at one of our offices in Scottsdale (480) 994-7342, in Prescott (928)778-7666.

Jon, thanks for helping me share this important message today with everyone.

Jon: Bruce, thanks for sharing it. That information is extremely valuable.

Bruce: Thanks, Jon.

Jon: Securities and advisory services offered through Commonwealth Financial Network®, member FINRA/SIPC, a registered investment advisor.

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