As the holidays rapidly approach, you may plan to stuff the stockings of family members with gifts that reduce the size of your taxable estate. Notably, you may give gifts that completely avoid tax liability thanks to the annual gift tax exclusion. This basic strategy can result in a happy holiday season for the entire family.
However, giving tax-smart gifts to family members at the end of the year isn’t as simple as leaving presents under the tree. In particular, it’s important to take into account various issues for tax purposes.
Background: Under the annual gift tax exclusion, you can give gifts to each recipient up to a specified amount with paying a penny of gift tax. The exclusion amount, which is indexed for inflation, is $19,000 per recipient for 2026. (It is expected to increase to $20,000 per recipient for 2027.)
The beauty of the deal is that you can gift up to the maximum amount of the annual exclusion without any hassle from the IRS. As a result, you can give away literally tens of thousands of dollars if you’re feeling generous this year. You don’t even have to file a gift tax return!
Example: Say that you and your spouse have three adult children and seven young grandchildren. If you give each one of them the maximum $19,000 this December, you can transfer $190,000 free of gift tax. Any excess will reduce the lofty unified estate and gift tax exemption of $15 million in 2026.
Furthermore, you can double the maximum gifts that are exempt if your spouse agrees to join in the gifts. Thus, the maximum exclusion for the ten recipients in 2026 is $380,000. Caveat: If you and your spouse make joint gifts, you must file a gift tax return.
Finally, you can “double up” again by repeating the same strategy in 2027 at any point in the year. For instance, you and your spouse can give a total of $380,000 to the ten offspring in December and another $380,000 in January. Therefore, you can pass a grand total of $760,000 to the younger generations in a matter of weeks without paying any gift tax!
Although you may have other valid reasons for giving away specific assets, taxes should be a prime consideration. Significantly, the recipient generally carries over your “basis” in the property, except if it has declined in value. In that case, the recipient is stuck with a basis equal to fair market value on the date of the gift.
Here are two rules of thumb for making gifts to low-bracket family members:
- Give away low-basis property that is appreciating in value. Accordingly, when the property is sold, the gain will be taxed to the recipient in their low tax bracket instead of to you in your high tax bracket.
- Keep high-basis property that is declining in value. If you give this property to a low-bracket family member, there will be a small loss, or no loss at all, because the recipient’s basis is the FMV. Any loss will be of limited tax value. However, if you keep the property and sell it yourself, you can realize a substantial tax loss to offset capital gains plus up to $3,000 of ordinary income.
Icing on the cake. In addition to other gifts, you can pay medical expenses or college tuition for a relative. These amounts don’t count toward the annual git tax exclusion if they paid directly to the provider (e.g., a hospital or university). Factor this into your gift-giving.
Sign in to get access to this free resource, and all of our whitepapers and reports.
Download this content today!
Register Now Already registered? Click here to Log In
