A little-known tax secret: Learn the benefits of the annual gift tax exclusion
- October 1, 2023: Vol. 10, Number 9

A little-known tax secret: Learn the benefits of the annual gift tax exclusion

by Peter Anastasian

For most of us, ensuring the financial security and prosperity of our loved ones is extremely important. Gifting stocks to children in a low tax bracket (e.g., college students, graduate students, unemployed) allows us to share our success. It presents an opportunity for tax-efficient wealth transfer.

Let’s dive deep into the benefits of gifting and unearth comprehensive strategies for maximizing tax savings through the annual gift tax exclusion. By harnessing this powerful tool, individuals can gift stocks yearly while “flying under the tax radar” and safeguarding their family’s financial future.

It’s important to understand a few fundamental principles to grasp the true potential of the gift tax exclusion. This annual exclusion is a strategic mechanism for anyone who wants to gift assets without incurring any gift tax liability.

The annual gift tax exclusion permits individuals to gift up to a specific dollar amount per recipient per year, tax free. This amount is adjusted periodically to account for inflation, enabling individuals to leverage this tool effectively.

For the year 2023, the exclusion amount is $17,000, meaning you can gift individuals up to $17,000 each and not have to pay taxes on those funds or assets.

The gift tax exclusion doesn’t just apply to gifts of cash. Gifting stocks can also present many advantages for both the benefactor and the beneficiary.

By transferring stocks to children, you not only impart a valuable asset but also lay the groundwork for their future financial success. Additionally, you can eliminate any tax liability associated with the transfer by taking advantage of the annual gift tax exclusion.

Let’s illustrate this with an example.

In 2023, the annual exclusion amount is $17,000 per recipient. That means that this year, you and your spouse can each gift up to $17,000 worth of stocks ($34,000 total) to each child without tax consequences. This strategic move allows you to give a generous gift to your children — one that will hopefully turn into a lifetime of savvy investing — while also removing these assets from your estate, potentially reducing future estate taxes.

Here’s another scenario.

Let’s look at a married couple earning $500,000 a year. They own shares of a high-performing tech stock with a cost basis of $3. They would owe the government if they sold $34,000 (the annual gifting amount for a married couple) worth of shares.

A $34,000 capital gain on the sale of their stock, regardless of their tax bracket, would be subject to significant taxes on the federal and state level.

Conversely, that same couple could gift the $34,000 of appreciated stock to a child who’s in college and has no income (the long-term capital gains rate is 0 percent if income is less than $44,625). Then, the child could sell all the shares once received and recognize the full gain.

The child can purchase the same security but has now reestablished their tax basis to $34,000.

One of the most remarkable aspects of utilizing the annual gift tax exclusion is its ability to reduce the amount you owe in taxes significantly. Since these gifts fall within the exclusion limit, they aren’t flagged by the IRS and don’t require any reporting or documentation. This unique advantage empowers you to transfer assets seamlessly without drawing undue attention or triggering unnecessary scrutiny.

It is crucial to highlight that you can exercise the annual exclusion every year, creating a golden opportunity to transfer substantial wealth over time. By consistently gifting stocks within the exclusion limit, you can gradually reduce the size of your estate, transferring assets to loved ones. At the same time, you’re still alive and potentially minimizing estate taxes overall.


This story was excerpted from an article written by Peter Anastasian, senior vice president and financial adviser at Wealth Enhancement Group. The complete version of this article appears on the Wealth Enhancement website here.

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