YOU CAN GIVE $17,000 to as many individuals as you wish in 2023 without worrying about the gift tax. The 2022 limit is $16,000. This is the annual gift-tax exclusion. Do you and your spouse have three kids? In 2023, you could together give each of them $34,000, thus shrinking your estate by $102,000. There’s even a special provision just for 529 college plans that allows you to contribute five times the gift-tax exclusion in a single year and count it as your gift for the next five years. There’s more about that in the college chapter.
Even if you give more than the gift-tax exclusion, you likely won’t pay gift taxes. Instead, the amount above the exclusion will reduce the sum you can leave to your heirs tax-free upon your death. Only if you manage to eat through your entire federal estate tax exclusion—$12.06 million in 2022 and $12.92 million in 2023—would you have to start paying gift taxes.
Let’s say you are a single parent and you gave your only child a gift of $1,017,000 in 2023. That gift would be $1 million above 2023’s $17,000 gift-tax exclusion, so it would reduce the amount you can leave tax-free at death to $11.92 million. The super-wealthy sometimes make such large gifts because it gets the money, including subsequent investment growth, out of their estate, thus trimming the eventual estate tax bill.
An interesting wrinkle: While you can only give $17,000 to another person in 2023 without worrying about the gift tax, there’s no limit on the sum you can pay toward another person’s medical or education expenses, as long as the money is paid directly to the medical provider or educational institution involved.
Our Humble Opinion: Giving away money is perhaps the cheapest and easiest way to shrink an estate. There are no fancy estate planning techniques involved and no legal fees, which may explain why this strategy isn’t given more publicity. If you can afford to make regular gifts to family members, seriously consider doing so.
Next: Smart Giving
Previous: Estate Checklist