The holidays are a time for giving, but as a tax attorney, I know that generosity can come with unexpected surprises if you’re not careful. Fortunately, with a little planning, you can maximize your gifts, reduce tax liabilities, and share the joy with your loved ones. As we approach year-end, let’s explore how to navigate the federal gift tax rules and make this season of giving stress-free.
Understanding Gift Taxes: Don’t Let the IRS Steal Your Holiday Cheer
The federal gift tax applies when you transfer money, property, or other assets to another person without expecting anything of equal value in return. However, the good news is that most gifts won’t trigger a tax bill thanks to exclusions and exemptions that allow for significant giving.
Let’s break it down:
Key Gift Tax Rules for 2024
1. Annual Gift Tax Exclusion: Give Freely Within the Limit
- As of December 2024, the annual gift tax exclusion is $17,000 per recipient.
- This means you can give up to $17,000 to as many individuals as you’d like without filing a gift tax return.
- Married couples can “split” gifts and give up to $34,000 per recipient without impacting their lifetime exemption.
2. Lifetime Gift Tax Exemption: Think Big Before It Shrinks
- The lifetime gift and estate tax exemption for 2024 is $13.61 million per person.
- This exemption applies to gifts exceeding the annual exclusion and covers the total amount you can give during your lifetime before incurring gift taxes.
- Heads up: This exemption is set to drop in 2026 to approximately $6 million (adjusted for inflation). Now is the time to consider larger gifts while the higher limits remain in effect.
3. Tax-Free Medical and Education Payments: Gifts with Purpose
- Payments made directly to a medical provider or educational institution on behalf of someone else are excluded from gift taxes.
- This is a fantastic way to help loved ones with significant expenses without impacting your annual or lifetime limits.
Year-End Strategies to Spread Holiday Cheer Without Tax Fear
1. Max Out Your Annual Exclusion
Haven’t used your $17,000-per-recipient limit yet? Now’s your chance. Cash, investments, or personal property make excellent tax-free gifts, and the end of the year is the perfect time to lock in these opportunities.
2. Superfund a 529 Plan
Planning to help fund a loved one’s education? Contributions to a 529 college savings plan qualify as gifts. You can even make a five-year contribution in one lump sum—up to $85,000 per recipient (or $170,000 for couples)—and spread it across five years of annual exclusions.
3. Give Appreciated Assets for a Double Win
Consider gifting stocks or mutual funds that have appreciated in value. While the recipient will inherit your cost basis, this strategy avoids capital gains taxes for you and provides them with a valuable asset.
4. Cover Tuition or Medical Bills Directly
Instead of gifting cash, pay tuition or medical expenses directly to the institution. These payments don’t count toward your annual or lifetime gift limits and can provide immediate, meaningful assistance.
5. Plan Larger Gifts Before the Exemption Drops
The current $13.61 million lifetime exemption offers a once-in-a-generation opportunity to transfer significant wealth tax-free. With the exemption set to shrink after 2025, consider using it now to pass on assets to heirs or fund trusts.
Avoid These Common Gift Tax Pitfalls
Forgetting to File Form 709
If your gift exceeds the annual exclusion, you must file a gift tax return. Now look: You may think … how would the IRS ever know that I made a large gift; so let me outline just a few of the ways these issues pop up!
The IRS might not immediately know about unreported gifts, but several mechanisms exist that could expose unreported gifts later. Here’s how the IRS might find out:
Reporting from the Recipient
- Income-Producing Assets: If the gift involves income-generating assets (e.g., rental property, stocks), the recipient’s reporting of income on their tax return might flag a transfer.
- Gift Disclosure in Litigation: Gifts that come up during divorce proceedings, creditor claims, or other legal disputes could be disclosed and reported to the IRS.
IRS Audit or Examination
- Auditing Related Parties: If the recipient or donor is audited, the IRS may investigate the transfer of assets or funds between them.
- Lifestyle Analysis: If the recipient’s lifestyle appears inconsistent with their reported income, the IRS may scrutinize the source of their assets.
Property Transfers and Title Changes
- Real Estate Transfers: Changes in property title recorded at the local or state level (e.g., gifting real estate) are public records and could come to the IRS’s attention, particularly if the property value exceeds the annual exclusion limit.
- Stock and Business Transfers: Transfers of significant equity or stocks could be reported to the IRS if companies or brokers document the change.
Estate Tax Return (Form 706)
- Mismatch with Lifetime Exemption Usage: If an estate tax return is filed at the donor’s death, the IRS will cross-check reported lifetime gifts against Form 709 filings. Unreported gifts exceeding the annual exclusion will be discovered.
Whistleblowers
Believe it or not ----some members of a family or business partners feel underappreciated, and therein begins the problem:
- Family Disputes: Inheritance disputes or familial disagreements often lead to one party alerting the IRS about unreported gifts.
- Business Partners: Gifting stakes in a business without proper documentation could lead a disgruntled partner to notify tax authorities.
- Family Members: Even if you are generous and trying to be kind and help your family….consider this case and the importance of careful filing:
- United States v. Harris (1991): In this case, David Kritzik provided substantial financial support to twin sisters Leigh Ann Conley and Lynnette Harris over several years. The IRS contended that these payments were taxable income, while the recipients argued they were non-taxable gifts. Although the court ultimately reversed the sisters' convictions for tax evasion (Whoa!!), the case underscores the complexities involved in distinguishing between gifts and taxable income, especially in the absence of proper documentation and reporting.
Bank and Financial Institution Reporting
- Large Cash Transfers: Banks are required to file Currency Transaction Reports (CTR) for transactions over $10,000. While not automatically a gift flag, it might prompt questions if patterns emerge.
- Account and Brokerage Activity: Transfers of large sums or assets from a donor’s account to a recipient may raise questions if audited.
Why Compliance Matters
While it might seem unlikely that unreported gifts would be discovered immediately, the risks of detection grow over time, especially when estate planning or large transactions occur. The penalties for failing to file Form 709 include potential interest, fines, and the reduction of the lifetime exemption, making compliance a safer and more responsible route.
The IRS imposes significant penalties for failing to report large gifts, particularly those received from foreign sources. These penalties are designed to ensure compliance and discourage tax avoidance. Below is a detailed explanation of the penalties and how they are calculated.
Penalties for Not Reporting Foreign Gifts
Form 3520 Penalties:
- Initial Penalty: If a U.S. person fails to file Form 3520 to report a large foreign gift, the penalty is 5% of the value of the gift for each month the gift is not reported, up to a maximum of 25% of the gift's value.
- Additional Penalties: If the failure to report continues for more than 90 days after the IRS mails a notice of the failure, an additional penalty of $10,000 is imposed for each 30-day period (or fraction thereof) during which the failure continues after the 90-day period has expired, up to a maximum of $50,000.
Form 709 Penalties:
- Failure to File: If a taxpayer fails to file Form 709 to report a large domestic gift, the penalty is 5% of the amount of the gift for each month the return is late, up to a maximum of 25% of the gift's value.
- Failure to Pay: If the taxpayer fails to pay the gift tax by the due date, the penalty is 0.5% of the unpaid tax for each month the tax is not paid, up to a maximum of 25% of the unpaid tax.
Interest on Penalties:
- Interest is charged on penalties for filing late, paying late, and other related penalties. The interest rates are determined quarterly and compounded daily.
Why Planning Now Brings Peace of Mind
Gift taxes aren’t just about avoiding penalties—they’re about making thoughtful decisions that preserve wealth, foster family ties, and reduce long-term tax burdens. Let us help you make sure you are doing it right!! By taking action now, you can enjoy the holidays knowing you’ve optimized your giving strategy.
Celebrating Generosity With Smart Financial Planning
At Durfee Law Group, we believe the spirit of giving should be about joy, not stress. Whether you’re supporting a family member’s education, investing in their future, or simply spreading holiday cheer, we’re here to help you make smart decisions that maximize your impact.
Let this season be one of thoughtful planning and heartfelt generosity. If you have questions about gift taxes or need assistance with year-end planning, reach out to our office. Together, we’ll craft a strategy that protects your legacy and helps you enjoy the holidays with peace of mind.
Not to be Corny, But: Make This Holiday Season a Gift That Keeps on Giving © 2024 by Durfee Law Group is licensed under CC BY 4.0 
Not to be Corny, But: Make This Holiday Season a Gift That Keeps on Giving