Give Cash Now, Cut Your Estate Tax Later

Are you having trouble finding gifts those "hard to shop for" relatives this holiday season? Don't waste any more time trying to find something they might want – give 'em cash! Everyone likes money, right? Plus, giving money to family or friends can also be a smart tax planning move. For wealthier Americans, giving away cash now can help you reduce or even avoid estate taxes when you die. Plus, you can make family and friends very, very happy!

The general rule is that any gift is subject to the federal gift tax. However, there's an important exception to this rule — you can give up to $16,000 per person in 2022 without having to file a gift tax return (the exemption amount goes up to $17,000 in 2023). If you're married, your spouse can also give $16,000 to the same people, jacking the annual tax-free gift up to $32,000 per person. (The recipient pays no tax on the money, either.)

So, for example, if you're married and have three married children and six grandchildren, you and your spouse can give up to $32,000 this year to each of your kids, their spouses and all the grandchildren without even having to file a gift tax return. That's $384,000 in tax-free gifts! And you can do that year-after-year without paying any gift tax unless the total of all your non-exempt gifts over the years exceeds the lifetime gift tax limit, which is $12.06 million for 2022 ($12.92 million for 2023). But since the $16,000 (or $32,000) limit is an annual limit, you have to make your gifts before the end of the year (gift checks must also be deposited by December 31).

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And here's the added bonus: Whatever you give away this year, up to the $16,000-per-recipient limit, won't be counted for estate tax purposes when you die. So, for example, if the current value of your estate is above the federal estate tax exemption amount ($12.06 million for 2022 and $12.92 million for 2023), giving away money now could drop the value below the exclusion amount, which would mean no federal estate tax when you pass away.

Also keep in mind that the estate tax exclusion amount will fall to $5 million (plus an inflation adjustment) in 2026, unless Congress permanently adopts the current amount. So, even if your estate is not worth more than the exclusion amount now, it might be after 2025. (IRS regulations also guarantee that tax-free gifts you make now won't trigger estate taxes if/when the exclusion amount is lowered.)

There could be state estate taxes to worry about, too — several states have their own estate tax, and all of them currently have exclusion amounts far below the current federal standard (as low as $1 million in Massachusetts and Oregon). In addition, even if giving away money now doesn't allow you to completely avoid estate taxes, you'll still reduce the estate tax owed by reducing the value of your estate.

What if you're feeling extra generous and want to give more than $16,000 (or $32,000 per couple) to someone this year? You'll have to file a gift tax return (Form 709), and the amount over $16,000 is potentially a taxable gift. However, you can still avoid gift and estate taxes if the total amount of taxable gifts so far over your lifetime is less than $12.06 million. So, if you're thinking of dropping a very large amount of cash in someone's lap, it doesn't necessarily mean you'll have to pay taxes on the gift.