Unwrapping the Gifts, Estate and Trust Taxes

The year 2024 will bring more reasons to be generous, since the Internal Revenue Service (IRS) has increased the limits for gift and estate tax exemption amounts to their highest amounts ever. It’s good news to start the year with, reports the article. Here is what you need to know about the gift and estate tax exemption limits increase for 2024.

The Annual Gift-Giving Party (with a Limit!)

Imagine a gift basket overflowing with goodies – that's kind of like the annual gift tax exclusion. In 2024, you can shower anyone (yes, anyone!) with gifts worth up to $18,000 per person without owing any taxes. Think of it as your yearly chance to be a gift-giving superhero.

For example, say you have two amazing grandkids. You can gift each of them $18,000 towards their college fund, for a total of $36,000, and the IRS won't bat an eye. But be careful! If you go over $18,000 per person, the amount above that counts against a lifetime limit (getting there next).

The Lifetime Exemption Chest (But it's Not Exactly Treasure)

This is where things get interesting. The government gives you a giant chest (figuratively, of course) to store away a certain amount of your wealth that you can give away or leave behind tax-free. In 2024, that amount is a whopping $13.61 million per person. That's a lot of moolah!

Let's revisit the college fund example. If you wanted to fully fund one of your grandkid's education with a one-time gift of, say, $100,000, that would use up a portion of your lifetime exemption. You'd be left with $13.61 million - [$100,000-$18,000] = $13.528 million remaining.

You would just have to use IRS Form 709 to report the gift and deduct $82,000 from the lifetime exemption of $13.61 million limit.

Gifts to spouse or non-U.S. citizen

Gifts between American spouses are virtually unlimited.. Couples have $24.84 million in estate tax exemptions, and going over this limit is only taxed upon the surviving spouse’s death.

However, a gift to a non-U.S. citizen, regardless of whether or not they are a U.S. resident, falls under different rules and is subject to an annual tax exclusion amount. The annual amount one may give to a spouse who is not a U.S. citizen increases to $185,000 in 2024 from $175,000 in 2023.

Something else to keep in mind—unless Congress acts, the lifetime estate and gift tax exemption is due to return to the pre-2017 Tax Cuts and Jobs Act level of $5.49 million on December 31, 2025.

Primary Tax Deductions for Trusts

There are multiple tax deductions that a trust might qualify for. Here are four categories of primary deductions that concern trusts.

• Contributions and Gifts - Since the person making these contribution has already paid taxes on the money, the IRS considers this double taxation and do not subject these to income tax. Also the money that the trust earns and distributes in the same year, it does not pay taxes on.

• Trustee and Tax Preparation Fees - The trust may deduct reasonable fees for trustee management and tax preparation. However, the trust may only deduct these fees based on the proportion of income that is taxable. For example, say that a trust received $20,000 worth of income in a given year. However, only $10,000 of that income was subject to taxes. The trust could then deduct half of its management and accounting fees.

• Charitable Donations - A trust may typically deduct any cash donations made to charity. Since this is a deduction it is nonrefundable, meaning that a trust cannot deduct more in donations than it earned in taxable income.

This blog provides a general and brief overview of Gift, Estate and Trust exemptions and is not intended as tax advice. It is essential to consult with a tax professional to discuss the specifics of your situation.

Let's conquer the world of finance together, one step at a time! You can reach out to the Numbreylla Team for any assistance.