When planning to pass on your wealth, it’s important to think beyond just a will or trust. The gift tax is a key factor that can impact how your estate is structured. By learning how gifting fits into the bigger picture, you can potentially decrease the taxable portion of your estate, making things easier for your beneficiaries down the road.
The relationship between state and federal tax laws is something every Wisconsin resident should consider when organizing their estate plans. Whether you want to gift assets to family, donate to a qualified charitable organization, or lower your taxable estate, this guide will show how these rules apply to help you make smarter decisions.
What Is a Gift Tax?
When you give money or property to someone without receiving equal value in return, you may be subject to a gift tax. This tax applies to the transfer of assets where there’s no expectation of payment or compensation. However, whether or not a gift is taxed depends largely on federal regulations.
The IRS permits individuals to gift a set amount per year to others without incurring gift taxes. This is referred to as the annual gift tax exclusion. If your gifts exceed this threshold, the excess is applied toward your lifetime exemption, which reduces the amount of your estate that may be subject to estate tax.
The lifetime exemption serves as a safeguard, allowing you to give substantial gifts over your lifetime without immediately incurring taxes. However, it’s important to track these amounts, as they can have implications for your overall estate planning strategy down the road.
Does Wisconsin Have a Gift Tax?
If you’re thinking about giving significant gifts in Wisconsin, you may wonder if the state imposes a gift tax. Fortunately, Wisconsin keeps things straightforward for its residents.
Wisconsin doesn’t have a gift tax of its own. This means you can transfer money, property, or other valuable assets without worrying about any extra state taxes. Although the state doesn’t impose a gift tax, the federal government’s rules still apply.
Federal Gift Tax Rules: How They Apply in Wisconsin
Even though Wisconsin doesn’t have a state gift tax, federal tax regulations still apply when giving substantial gifts. These rules can affect your financial plans, so it’s important to understand them.
Annual Gift and Estate Tax Exemption
Under the federal annual gift tax exclusion, you’re allowed to give up to $18,000 per person in 2024 without triggering the need to pay taxes on the gift.1 You can give this amount to as many individuals as you like without any tax consequences.
If your gift to one person exceeds the $18,000 annual limit, the amount over that limit will count against your lifetime gifts exemption. This exemption reduces the amount you can pass on tax-free when it comes time to settle your estate.
Lifetime Gift and Estate Tax Exemption
The lifetime gift and estate tax exemption is a combined limit on the value of assets you can transfer, either during your lifetime or after your death, without being taxed by the federal government.
In 2024, the exemption is set at $13.61 million.2 This amount allows you to make gifts or transfer assets up to this value, either while you’re alive or as part of your estate, without having to pay federal taxes on those transfers. Furthermore, tax laws change, so it’s important to stay updated on any adjustments to this exemption in the future.
If the combined total of your lifetime gifts and estate value exceeds the lifetime exemption limit, the excess amount will be subject to federal tax. The tax only kicks in once you’ve used up both your annual and lifetime exclusions, which can reduce the total amount left to your beneficiaries. Estate and gift tax rates range from 18% to 40% depending on the exceeding amounts.3
By gifting assets over the course of your life, you can reduce the overall taxable value of your estate. Taking advantage of both the annual gift tax exclusion and the lifetime exemption allows you to minimize future taxes for your heirs, while still benefiting from tax-free transfers.
Please Note: The $13.61 million lifetime exemption will be reduced to around $5 million per individual at the start of 2026 due to the sunsetting of the Tax Cut and Jobs Act (TCJA).4
Filing a Federal Gift Tax Return
Gifts that exceed the annual exclusion limit require you to file a gift tax return. Being aware of the filing requirements can help you avoid unnecessary issues. If the amount of your gift to any one person exceeds the annual gift tax exclusion of $18,000 in 2024, you will need to submit Form 709 (i.e. a gift tax return).
This form keeps track of how much of your lifetime exemption has been used. Although most people don’t owe taxes because of the lifetime exemption, the IRS still requires you to file in order to record the gifts that exceed the annual limit.
Mistakes on Form 709 are common, such as forgetting to account for certain details or misunderstanding what counts as a taxable gift. One example is failing to report split gifts made between spouses. Another common error is incorrectly listing gifts for educational or medical expenses, which may actually be exempt.
Please Note: If you fail to file when required, you could face penalties. The IRS might impose fines or charge interest on any unpaid taxes. Filing the return correctly and on time can save you from these complications and help keep your estate plans on track.
Gifting to Family Members: Special Considerations
When giving to family members, there are specific tax rules you should be aware of. These vary depending on whether you’re transferring assets to a spouse, children, or other dependents. By understanding these rules, you can make the most out of the tax benefits available. Here’s a general overview of what you should know:
Gifting to spouses: One major benefit is the unlimited marital deduction, which allows you to transfer assets of any value to your spouse, provided they are a US citizen, without triggering federal gift taxes. If your spouse isn’t a U.S. citizen, the annual exclusion is capped at $185,000 in 2024.5
Gifting to children: Parents often gift assets to their children as a way to transfer wealth. The annual gift tax exclusion often comes into play here. This allows you (as an individual) to give up to $18,000 per child in 2024 without having to file a gift tax return. If you exceed this amount, the extra value is deducted from your lifetime exemption. Gifts to children can be in many forms, from cash to stocks or even property.
Educational gifts: Another tax-friendly way to support family members is through educational gifts. Payments made directly to an educational institution for tuition purposes do not count toward your annual gift tax exclusion. Additionally, contributions to 529 plans can help with future education costs, though they might be subject to annual limits.
Gifting Real Estate in Wisconsin: Tax Implications
Gifting real estate can be a valuable way to transfer wealth, but it’s important to understand the tax implications that come with giving property in Wisconsin.
The first step is transferring ownership through a deed, which legally moves the property to the recipient. Consulting with a real estate attorney can help ensure the legal aspects of asset transfers are handled correctly and recorded properly. However, the biggest considerations usually arise with taxes.
One major factor is the capital gains tax. When you give real estate, the recipient inherits your adjusted basis, meaning the price you originally paid for the property. If the recipient decides to sell the property, they may face capital gains taxes based on the property’s original purchase price and its value at the time of sale, which could result in a significant tax burden if the property has appreciated considerably. For more information on these values see this official IRS page.
Typically, property values exceed the annual gift tax exclusion. This means you’ll also need to file a gift tax return (Form 709) to report the transfer. Even though most people won’t owe gift tax because of the lifetime exemption, it’s important to document the gift properly.
Gifting as Part of a Wisconsin Estate Plan
In Wisconsin, making gifts part of your estate plan can be an effective way to manage your wealth and reduce future tax obligations. By gifting during your lifetime, you can take proactive steps to lower the taxable value of your estate and potentially minimize estate taxes for your heirs.
One of the main benefits of gifting now is the opportunity to gradually reduce the amount of your taxable estate. Through the annual gift tax exclusion you can make significant gifts over time without using up your lifetime exemption. This strategy can help lower your estate’s overall taxable value, making a big difference in the long run.
For larger gifts, setting up a trust can be a useful tool. Trusts offer a more controlled way to transfer assets like property or investments, ensuring that gifts are managed according to your specific wishes and potentially providing tax advantages.
When considering whether to gift assets now or leave them in your will, you’ll want to think about the advantages and disadvantages of gifting during your lifetime. While gifting helps reduce your estate’s tax exposure and gives you the chance to see your loved ones benefit, you also need to make sure you’re preserving enough resources for your future.
Gifting to Charities: Tax Benefits
Donating to charity can make a meaningful difference in your community while offering you potential tax savings. In Wisconsin, charitable contributions may reduce both your taxable income and estate, making this a valuable strategy for your financial planning.
Donating to a qualified charitable organization may allow you to reduce your taxable income through deductions based on the value of your contributions. As long as the organization holds IRS tax-exempt status, your donations, whether large or small, can qualify for these deductions. This applies to gifts of cash, investments, and even property.
Knowing the limits on how much you can deduct is important. Generally, you can deduct cash donations up to 60% of your adjusted gross income (AGI), while contributions of capital gain property, like stocks or real estate, are capped at 30%.6 These limits allow you to give generously while reducing your overall tax bill.
Please Note: Donor-advised funds (DAFs) have become a favored tool for those looking to maximize their charitable contributions. When contributing to a donor-advised fund (DAF), you can take an immediate tax deduction while having the flexibility to distribute the funds to charities over time. This structure allows for significant flexibility, as you can make a large donation in one year to potentially lower your taxable income, while distributing the funds to chosen charities in future years according to DAF guidelines.
Common Gift Tax Planning Mistakes to Avoid
While gifting is a smart way to lower your taxable estate, common mistakes can lead to unnecessary complications. Here are some typical errors to watch out for:
Overlooking the annual exclusion limit: One mistake people make is not tracking how much they give. For 2024, the annual gift tax exclusion is $18,000 per recipient. Staying under this limit means you don’t have to report the gift or tap into your lifetime exemption. However, if you give more than one gift to the same person in a year, you might exceed the exclusion limit without realizing it.
Neglecting future financial needs: It’s easy to focus on the advantages of gifting now without thinking about your own long-term financial needs. Giving away too much too early can reduce your financial flexibility later in life. It’s important to balance your generosity with the resources you might need in the future.
Lack of documentation: Another common error is not keeping detailed records of your gifts. If your gifts exceed the annual exclusion, it’s best to properly document them for tax purposes. Misunderstandings about what counts as a taxable gift can lead to issues when filing taxes or during estate planning, so it’s best to have accurate records of all gifts.
How to Incorporate Gifting into a Long-Term Financial Plan
Gifting can be a powerful tool in a long-term financial strategy, allowing you to transfer wealth while reducing your taxable estate in ways that suit your individual needs. By using thoughtful gifting methods, you can not only provide for your family but also reduce your estate tax liabilities over time.
For instance, you might consider gifting shares of appreciated stock to your children each year. Utilizing the annual gift tax exclusion allows for the gradual transfer of assets, such as stocks, without incurring taxes, enabling future growth to benefit the recipients, like your children. This approach not only reduces the size of your taxable estate but also potentially shifts future capital gains to your children, who may be in a lower tax bracket, making it a win-win strategy for preserving wealth across generations.
Another approach is to use charitable giving strategically. You can contribute multi-year gifts to a donor-advised fund (DAF), allowing you to make a larger impact on your chosen causes while reducing your taxable estate. This option offers flexibility, as you can give a significant sum upfront for tax purposes while controlling how and when the funds are distributed to charities over time.
Additionally, you might choose to pay tuition or medical bills directly on behalf of a loved one. Direct payments for education or healthcare aren’t subject to gift tax, making this another effective way to lower your estate while supporting family members without cutting into your lifetime exemption.
Ultimately, gifting is a versatile and individualized strategy. Whether you’re reducing your estate by transferring assets, supporting charitable causes, or directly covering a loved one’s expenses, an intergenerational wealth transfer strategy can be tailored to meet your personal goals and values.
We Can Help You Further
Incorporating gifting into your estate plan is a smart way to reduce estate taxes and transfer wealth to the people and causes that matter to you. However, to maximize the benefits of gifting, it’s important to plan carefully and take full advantage of the tools at your disposal.
A financial advisor can offer valuable insights as you decide how gifting fits into your overall estate strategy. Whether you’re looking to reduce your taxable estate, structure gifts to family members, or support charities, an advisor can ensure that your plan aligns with both your short-term and long-term goals.
If you’re ready to explore how gifting can enhance your estate plan and overall financial plan, our team can help you find the right path. Together, we’ll evaluate the best options for your unique situation, helping to create a smoother transfer of wealth to future generations or reducing the tax burden on your estate. Schedule an introductory call with our team today to create and secure your legacy.
Sources:
- https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024
- https://www.kiplinger.com/retirement/wealth-transfer-and-strategic-gifting-opportunities
- https://www.nerdwallet.com/article/taxes/gift-tax-rate
- https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024
- https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes-for-nonresidents-not-citizens-of-the-united-states#:~:text=If%20your%20spouse%20is%20not,IRC%20%C2%A7%202523(i).
- https://www.investopedia.com/articles/personal-finance/041315/tips-charitable-contributions-limits-and-taxes.asp
Sheena is a highly regarded financial professional known for her clear explanations and practical advice on complex financial matters. She earned her CERTIFIED FINANCIAL PLANNER™️ designation in 2010 and holds a Bachelor of Science degree in Finance from the University of Wisconsin LaCrosse.