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Knowing how the gift tax works can help save you money

On Behalf of | Jul 24, 2023 | Estate Planning And Litigation |

If you want to gift a portion of your assets to your children in California, it’s crucial to understand how doing so can be taxed. While California doesn’t have a gift tax, the federal government does, which can be as high as 40% if you exceed the annual threshold. Knowing the limits and what counts as a gift can help you transfer wealth wisely.

What assets count as a gift?

The IRS defines a gift as the movement of assets to another individual or entity without expecting anything in return. Examples of these assets include the following:

  • Bank, retirement and brokerage accounts
  • Stocks and bonds
  • Homes and automobiles
  • Jewelry
  • No or low-interest loans

In 2023, you could give a gift of $17,000 in assets and not trigger the federal gift tax. However, you must also consider the lifetime gift and estate tax exemption amount when giving a gift to a person or entity. In 2023, the IRS used $12.92 million as the amount. If you give over the $17,000 exclusion figure, the excess dollar amount of assets transferred goes against your lifetime gift and estate tax exemption amount. If you exceed that amount, the gift tax rate could be as high as 40 percent, depending on the dollar amount exceeding your lifetime exemption.

Reduce your estate size to avoid taxes

California doesn’t have an estate tax. However, your estate will still be taxed as high as 40 percent if the $12.92 million lifetime gift and estate tax exemption is exceeded. If you have a large estate, you may want to create a revocable trust during estate planning to pass assets on to beneficiaries, which can reduce the size of your taxable estate.

Giving to some entities and individuals helps avoid a gift tax

You can also avoid the gift tax by giving assets to your spouse, charities, medical and educational institutions.

Understanding how gifts are taxed is essential to transfer assets without paying the IRS. Using a trust may be the best option in this situation.

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