By Ann Miller, CPA | Manager, Tax
As we near the close of 2022, now is the time to make any last-minute gifts to fully use the annual gift tax exclusion for 2022.
The annual gift tax exclusion amounts available for a gift made to an individual either directly or indirectly without filing a gift tax return is $16,000. The amount for 2023 has now been increased to $17,000.
Lifetime Exclusion and Portability
A donor can annually give $16,000 to an individual either directly or indirectly. This is the amount for 2022 and $17,000 can be given in 2023. The annual exclusion applies to gifts to each donee. In other words, if you give each of your children $16,000 in 2022, the annual exclusion applies to each gift. If you and your spouse want to give away property that you own together, you are each entitled to the annual exclusion amount on the gift. Together, you can give $32,000 to each donee in 2022 and $34,000 in 2023. The general rule is that any gift is a taxable gift. However, there are some exceptions to the rule, such as: gifts that are not more than the annual exclusion for the calendar year, tuition or medical expenses you pay on behalf of someone (these must be paid directly to the school or medical institution), gifts to your spouse, gifts to political organization for its use, and gifts to a qualifying charity for its use.
If you do give more than the annual exclusion amount to one person in a single year, you will have to file a gift tax return. However, you most likely will not have to pay any gift tax unless you gave an amount over the lifetime exclusion. The rules let you give a substantial amount during your lifetime without paying the gift tax. The unified estate and gift tax lifetime exclusion amount is $12,060,000 and $12,920,000 for 2022 and 2023 respectively. For example, if you use $500,000 of the limit by making gifts during your lifetime, you have reduced by $500,000 the amount that can pass through your estate free of the estate tax. Also, of note is that if one spouse does not use their full lifetime exclusion, there is now the concept of portability. Portability allows a surviving spouse to use a deceased spouse’s unused estate tax exclusion in addition to their lifetime estate tax exclusion.
You should not ignore your lifetime limit, even if you feel certain that your lifetime gifts will never add up to that amount. It pays to plan your gifts around the annual exclusion amount and the exclusions for educational and medical expenses whenever possible.
Other Year-End Planning Ideas: Qualified Charitable Distribution from an IRA
Another year-end planning idea is the plan of doing a tax-free qualified charitable distribution directly from an IRA.
Taxpayers age 72 and older must take required minimum distributions (RMD) from their IRAs before the end of the year. One way to reduce the tax burden of this distribution is to directly transfer the RMD to a qualified charity up to $100,000. When this is done, the distribution is not included in income on page 1 of Form 1040, and since the income is not included, there is not a charitable deduction for the transfer to the charity on Schedule A of Form 1040. This tax-free transfer was made permanent.
A few items to note are that the distribution must be made directly from the IRA to the charity, and the charity must be a qualifying charity, this does not include a private foundation or a donor-advised fund. Also, for a married couple, if both spouses have an IRA with an RMD requirement, both can do the qualified charitable distribution up to $100,000 each.
Benefits of the Qualified Charitable Distribution
This tax planning strategy helps in reducing adjusted gross income (AGI), which is a benchmark for various other tax calculations. As most states start with federal adjusted gross income in their tax calculations, this would reduce state taxes as the RMD would not be included in income for state purposes.
This also benefits middle to lower-income taxpayers. Due to the increase in the standard deduction, more tax filers will not have enough to itemize. Thus, the use of an IRA RMD directly to a charity would still give you a tax benefit.
The charity should receive the qualified charitable distribution by December 31st, so it would be a good idea to get this process started by mid-December.
There are multiple year-end tax planning strategies. If you have questions about these planning ideas or would like to set up a year-end tax planning meeting, contact me directly to get started.