One of the most important strategies for wealth management is gifting. When done correctly, strategic gifting can reduce estate tax liability and ensure that you can pass on your wealth in the most efficient way possible.
If you want to know how to maximize your gift tax exemption, we can help. MyStages® is here to answer your questions and provide knowledgeable guidance on how to protect and maximize your assets. Please contact us to learn more about tax-efficient gifting, pre-retirement planning, and other investing strategies.
Understanding Tax Laws and Exemptions
Can you reduce taxes by gifting money? Yes, gifting strategies help you take advantage of current tax laws and exemptions to minimize your tax burden and increase the power of your financial gifts. Whether you are interested in comprehensive estate planning or you just want to minimize taxes for the year, tax-efficient gifting offers a solution.
What are the current gift tax exemptions for the year 2025? The Federal Gift and Estate Tax Exemption for 2025 is $18,000 per individual and $36,000 for married couples. That means you can give up to $18,000 in gifts to as many people as you like throughout the year. As long as you don’t exceed $18,000, or $36,000 as a married couple, you won’t need to file a gift tax return.
When you file a gift tax return for amounts exceeding the annual limit, the excess amount you gave is subtracted from your lifetime limit.
The tax-free lifetime limit that families can give beneficiaries as part of their estate or over their lifetime is $13.61 million per individual and $27.22 million for married couples in 2024. This is set to change when the Tax Cuts and Jobs Act of 2017 expires in 2026, although that could change.
Gifts can include but are not limited to, real estate, cash, vehicles, art, other property, and interest-free loans.
Once you reach the lifetime limit, you will need to pay gift tax on any amount that exceeds that limit.
Some types of gifts are exempt from the federal gift tax. You can contribute to these as much as you like without having to pay gift tax or file gift tax returns. These include:
- Gifts to IRS-approved charities
- Gifts to your spouse
- Paying the medical expenses of others directly to the medical service provider
- Paying the tuition of others directly to the educational institution
Strategic Gifting Considerations
The 2025 annual gift tax exclusion of $18,000 per individual gives you a lot of options for reducing your taxable income. You can give up to $18,000 in gifts to as many individuals as you want. Any amount that you give over $18,000 will require you to pay gift tax on that excess amount. So, if you gave $19,000 to an individual, you would need to file a gift tax return.
One major benefit to being married is that you and your spouse can give double the individual amount as gifts each year. Currently, that is $36,000. That means you can give $36,000 in gifts to as many individuals as you want each year.
The Lifetime Gift Tax Exemption often comes into play when individuals and couples get closer to the end of their lives and need to make larger gifts. They may find it relatively easy to stay within the annual gift limits, but when they need to pass on their estate they can run into gift tax issues due to the size of their estates.
It’s possible to minimize gift tax in these situations by using certain strategies, such as:
- Maximizing annual gifting: If you can max out your annual gifts over time, you can lessen the size of your estate and the gift tax it might trigger.
- Taking advantage of current lifetime limits: The current lifetime limit is significantly higher than it has been in the past and may not stay that high. Maximizing gifts during this time frame can minimize gift tax.
Tax-Efficient Gifting Strategies
What types of assets are eligible for tax-efficient gifting? If you remain within annual or lifetime limits, any type of asset can work. But if you are worried about exceeding those limits, consider some of the following:
Direct Tuition and Medical Expense Payments
As mentioned above, the IRS allows you to pay tuition and medical expenses for others tax-free as long as you pay directly to the service provider.
Charitable Giving and Donor-Advised Funds
You can make unlimited contributions to IRS-approved charities without incurring gift taxes.
Donor-advised funds are also a good option for reducing your tax burden. You can donate a large sum to a donor-advised fund that will distribute those funds as the donor sees fit.
Life Insurance Trusts
An irrevocable life insurance trust lets you give assets to a trust that will purchase life insurance in your name. When you die, the life insurance policy will pay out to the trust, which will then distribute the proceeds to the beneficiaries that you name.
Grantor Retained Annuity Trusts
If you have assets that you expect to appreciate significantly in value, you can use this type of trust to benefit both you and your beneficiaries. You donate the asset to the trust and receive a regular annuity payment. The trust retains control over the asset and the appreciation of the assets can pass to your beneficiaries without gift or estate taxes.
Charitable Remainder Trusts
You can use this type of trust to gain a potential income stream for you or any beneficiaries you choose while giving assets to a charity or charity. It’s a complex process that can be expensive to manage, but it does allow you to generate income from certain assets, reduce taxable income and gift tax, and eventually give assets to a preferred charity.
Maximize Your Wealth for Future Financial Security
Strategic gifting offers many possibilities to reduce taxable income, protect your estate, and avoid gift tax. By understanding annual and lifetime gift limits, you can avoid the need to pay gift tax in many circumstances. However, if you have significant wealth to preserve, it’s important to talk with professionals about estate planning and wealth preservation strategies.
MyStages® can help you navigate the complexities of gifting. Contact us to ensure compliance with current tax laws and maximize the benefits of your gifting plans.
