Reference: Elder Law Answers (November 15, 2023), 2024 Annual Gift and Estate Tax Exemption Adjustments
As we usher in the new year, the Internal Revenue Service (IRS) has announced revisions to the annual gift tax and estate tax exclusions, bringing about significant changes that will impact individuals planning their financial strategies for 2024.
Gift Tax Exemption for 2024
Every year, individuals have the opportunity to make tax-free gifts up to a specified amount. This annual gift tax exclusion is subject to adjustments based on inflation. Starting January 1, 2024, the exclusion for gifts will be $18,000 per recipient, a notable increase from $17,000 in 2023. Married couples filing jointly can take advantage of doubling this amount, allowing them to gift $36,000 to each recipient in 2024.
Should an individual taxpayer choose to gift less than $18,000 to any one person throughout 2024, reporting the gift to the IRS is generally unnecessary. However, surpassing the $18,000 threshold requires the gift giver to file a gift tax return. It's important to note that the gift giver may not necessarily have to pay a gift tax if the amount exceeds $18,000, as they can apply their lifetime gift tax exclusion.
2024 Federal Estate Tax Exemption
The federal estate tax exemption is poised to increase in 2024, rising to $13.61 million, up from $12.92 million in 2023. For couples, this exemption will amount to $27.22 million. Essentially, estates valued at less than $13.61 million in 2024 will not be subject to federal estate taxes.
While federal estate taxes typically impact only the heirs of the wealthiest Americans, individuals with significant estates should consider the potential implications. Take Vanessa, a successful business owner with a taxable estate of $16 million. In 2024, her estate would exceed the $13.61 million threshold, making it subject to federal estate taxes.
To mitigate potential tax burdens, affluent individuals often choose to gift assets to loved ones during their lifetime, reducing the estate's tax liability upon their death.
Combined Gift and Estate Tax Exclusions
The lifetime, or combined, gift and estate tax exemption, linked to the federal estate tax exemption, is set to increase in 2024. Individuals will have a $13.61 million exemption, while couples can leverage a $27.22 million exemption.
Consider Vanessa's scenario. If she decides to gift a vacation home worth $1 million to her child, she can utilize the lifetime gift and estate tax exemption by deducting $982,000 from her combined exemption. This strategic move allows Vanessa to give away an additional $12.62 million in assets before reaching her lifetime gift exclusion limit.
It's crucial to be aware that the high lifetime gift and estate tax exclusion of $13.61 million is anticipated to decrease significantly at the end of 2025, potentially dropping to around $6 million. This impending change could have tax implications for high-net-worth individuals whose estates are subject to taxation in 2026.
In conclusion, staying informed about these revisions to gift and estate tax exclusions is essential for individuals managing their financial affairs. Considering the potential impact on estate planning and lifetime gifting strategies is crucial, especially with the looming changes in the tax landscape beyond 2025. As we navigate through 2024, individuals are encouraged to consult with financial and legal professionals to optimize their financial planning in light of these evolving tax regulations.