Waiting Until the End of the Year to Use Your Gift Tax Exclusion: Not Only Unnecessary, But Possibly Less Efficient
December often brings a sense of urgency to put the year’s finances in order and understand tax liabilities. The late months of the year also see a cluster of gift-giving holidays, making an obvious — but not necessarily advantageous — time for giving. In the case of annual gifting, acting earlier in the year is often more advantageous.
This is true for two primary reasons. First, if you gift an asset with appreciation potential — such as stock or real estate — to an individual or trust, you eliminate the appreciation and income from your own tax base for the year of the gift as well as the following years. Second, by making the gift early in the year, you give the recipient the potential growth of the gift throughout the remainder of the year and beyond.
Important Considerations for Early Gifting
While gifting appreciating assets often benefits both the donor and beneficiary, you will want to carefully weigh the pros and cons with your advisors. Most importantly, consider the beneficiary’s tax liability. The benefit to you of annual tax free gifts comes at the cost of the recipient receiving the asset with your cost basis. For bequests at death, on the other hand, beneficiaries receive assets with a fair market value cost basis.
It is also important to note that making annual exclusion gifts is most advantageous for individuals and married couples who expect to have a taxable estate for federal or state estate tax purposes. With the passage of the Tax Cuts and Jobs Act, this pool shrank considerably – at least temporarily – as the federal lifetime gift tax exemption amount more than doubled. That said, the current higher exclusion amount (in 2024, $13.61 million per individual and $27.22 million per couple) will sunset on December 31, 2025 and could be lowered beforehand depending on changes in tax policy.
Potential Advantages of Early Retirement and College Savings Plan Contributions
Annual gifts are not the only planning that might make sense early in the year. You may also benefit by funding your retirement accounts and any college savings plans early in the year, every year. However, consult with your trusted tax and financial advisors first, as each individual’s and family’s financial and tax circumstances are unique.
Financial Education Opportunities for Your Children
In addition to maximizing the benefits of their financial gifts, many parents and grandparents also wish to equip their children to manage them responsibly. Financial education is one of the best ways to achieve this goal. To help, talk to your advisors about where to find age-appropriate resources, and learn more about Northern Trust’s Essentials financial literacy curriculum designed for young adults.