Transfers Not Subject to Gift Tax

United States taxpayers pay an estate or gift tax on wealth transfers to the extent that the aggregate value of the transfers, whether upon death or during lifetime, exceeds $12,920,000 in 2023. On January 1, 2026, this exclusion amount is scheduled to be reduced roughly in half. Because of this, many taxpayers are considering utilizing this high capacity to give without taxes by utilizing their exclusion before it is reduced.

In general, any gratuitous transfer is reportable, and will reduce a taxpayer's capacity to transfer wealth without tax, but there are important exceptions. One important exception is the annual exclusion, which I discussed in a prior post, which currently allows each taxpayer to gift up to $17,000 per year per donee. This is perhaps the most widely known mechanism for transferring wealth without any gift or estate tax impact, but there are others as well.

Any taxpayer may make unlimited tuition payments on behalf of any individual without needing to report the gift, pay gift tax, or use their lifetime exclusion. Any such payments must be made directly to the educational institution. Similarly, any amounts may be paid to educational institutions for their general charitable purposes, just as any amounts may be paid to other charitable organizations free of gift or estate tax.

Any taxpayer may generally make payments directly to medical providers for medical payments or medical insurance premiums for others. Not only are such payments free from gift or estate tax, an income tax deduction may be available for the taxpayer, just as a charitable deduction may be available for gifts to charities for the benefit of the public. Finally, gifts to political organizations are generally exempt from gift tax. Using the tools described herein can be effective ways to mitigate gift and estate taxes.

Posted in: Estate Tax