How to Save Money on The Gift Tax in New York City

The gift tax is a tax imposed on gifts you make during your lifetime. At the federal level, the IRS imposes a gift tax on cumulative gifts exceeding a certain threshold. Additionally, some states like New York impose their own separate gift taxes. If you live in New York or own property there, you need to be aware of both the federal and state gift tax rules to minimize your tax liability.

The gift tax is often overlooked. If you are unaware of the exclusions, it can result in thousands of dollars in unnecessary taxes. But with proper planning, you can avoid or significantly reduce gift taxes on transfers to your loved ones.

The federal government allows you to make some gifts tax-free. By structuring your gifts properly and taking advantage of federal exemptions, you can avoid gift taxes on transfers to individuals. Here are some of the main ways to avoid federal gift tax:

Annual Exclusion Gifts

One of the easiest ways to avoid federal gift tax is to take advantage of the annual exclusion. This allows you to give up to $18,000 per recipient each year without the gifts counting against your $13.61 million lifetime exemption (as of January 2024). For example, if you have 3 children, you could give each child $18,000 annually – $54,000 total – completely tax-free and you’ll still be able to use up the full amount of your lifetime exemption.

Pay Medical and Education Expenses

Payments made directly to the institutions for a family member’s education or health care do not count as taxable gifts. You can pay unlimited amounts for family member’s tuition or medical bills with no gift tax consequences.

Use Your Lifetime Exemption

In addition to the annual exclusion, each individual has a $13.61 million federal gift and estate tax exemption. So you can make lifetime gifts up to this amount before incurring any federal gift tax. Portability allows you to combine exemptions with your spouse where unused exemptions of one spouse upon death can be transferred to the surviving spouse.

Gift Splitting

If you’re married, gift splitting allows you and your spouse to combine your exemptions into one larger exemption even if only one spouse provides the assets. This lets you double the amount covered by the exemptions. For example, if X gifts $36,000 to her brother this year, by gift splitting with her husband on their tax return, it can be reported as two $18,000 gifts – one from X and one from her husband. This allows the annual exclusion to be applied twice, completely avoiding tax on the $36,000 gift.

New York State Estate Tax

New York does not impose gift taxes but it has a 3-year clawback period for gifts that are considered as part of the estate and subjected to estate tax. As of January 2024, the lifetime estate tax exemption is $6.94 million. Any gifts made three years prior to the death of the decedent shall be considered as part of the decedent’s estate, and gifts cumulatively made in excess of exempted amount shall be subjected to estate tax.

Gift tax rules and exemptions can be complicated. With proper planning, however, you can successfully transfer substantial assets to loved ones without incurring tax burdens. We at the Law Offices of Albert Goodwin are here for you.
We are located in Midtown Manhattan in New York City. You can call us at 212-233-1233 or send us an email at [email protected].

Why Annual Exclusion Gifting Is So Powerful

The annual exclusion is the foundation of most lifetime gift tax planning. While the per-donee amount may seem modest, the cumulative effect over years across multiple beneficiaries is substantial. Consider:

• A couple with three children and seven grandchildren has ten direct descendants.
• Each spouse can give the annual exclusion amount per descendant per year.
• The couple can transfer $360,000 (in 2024) per year tax-free using only the annual exclusion.
• Over ten years of consistent gifting, that is $3.6 million transferred without using any lifetime exemption.
• The transferred assets and their future appreciation are outside the donors' estates.

For families with substantial wealth, annual exclusion gifting can move significant resources to the next generation gradually, without the tax consequences of larger one-time transfers.

Direct Tuition and Medical Payments

The exclusion for direct tuition and medical payments is one of the most underused gift planning tools. The exclusion has specific requirements:

• The payment must be made directly to the institution. Paying the beneficiary so the beneficiary can pay the school does not qualify. The donor must write the check to the educational institution or medical provider directly.
• Tuition only, not room and board or other expenses. The educational exclusion covers only tuition. Room and board, books, fees, and other expenses do not qualify.
• Medical expenses must be for medical care. The exclusion covers diagnosis, treatment, prevention of disease, and related services. Medical insurance premiums also qualify.
• No annual limit. The exclusion is in addition to the annual exclusion, with no separate dollar limit.

Grandparents commonly use this exclusion to fund grandchildren's college education without using their annual exclusion or lifetime exemption. The payments go directly to the universities, the grandchildren benefit, and no gift tax consequences attach.

529 College Savings Plans

Section 529 plans offer additional gift tax planning. The plans permit five years of annual exclusion gifts to be made in a single year (with the donor electing to treat the contribution as spread over five years for gift tax purposes). The donor uses no lifetime exemption, and the funds grow tax-free for the beneficiary's qualified education expenses.

This "five-year election" is particularly useful for grandparents who want to make a substantial education gift to a grandchild without spreading it over actual years. A single contribution of five years of annual exclusion (currently $90,000 per donor per beneficiary, or $180,000 per couple) can fund a substantial portion of a college education in one transaction.

The Federal Lifetime Exemption

For substantial gifts beyond what the annual exclusion can cover, the federal lifetime gift and estate tax exemption provides additional capacity. The exemption is currently very high (over $13 million per individual in 2024, $27 million per couple), making most estates exempt from federal estate tax.

However, the exemption is scheduled to sunset at the end of 2025 to approximately half its current level. This impending change has prompted significant planning activity:

• Wealthy families are making lifetime gifts now to use the current high exemption.
• Spousal Lifetime Access Trusts (SLATs) allow one spouse to use exemption while preserving indirect access through the other spouse.
• Generation-skipping transfers move assets to grandchildren or further descendants.
• Asset-freezing techniques (GRATs, IDGTs) lock in current values while transferring future appreciation.

For families with assets above the post-2025 threshold, planning to use the current exemption is time-sensitive.

The New York Estate Tax Cliff

New York has its own estate tax with a much lower exemption than the federal exemption (currently approximately $6.94 million in 2024). The exemption is also structured as a cliff — estates that exceed the exemption by more than 5% lose the entire benefit of the exemption, not just the excess.

The cliff produces an unusual planning dynamic. An estate that is just over the cliff faces a much higher tax than an estate just below it. For estates near the New York exemption threshold, careful planning to keep the estate just under the cliff is valuable.

Three-Year Clawback in New York

New York has a special rule that adds back to the gross estate any gifts the decedent made within three years of death. This rule is meant to prevent deathbed gifting designed to defeat the New York estate tax. The clawback applies even for gifts that qualified for the federal annual exclusion.

For New York planning, this means:

• Gifts made more than three years before death are outside the New York estate tax base.
• Gifts made within three years are pulled back into the estate.
• The three-year clawback creates an incentive to start gifting programs early, when health is good.
• Deathbed gifting is generally ineffective for New York estate tax purposes.

Documenting Gifts

For tax planning gifts, proper documentation is essential. The donor should:

• File a federal gift tax return (Form 709) for gifts above the annual exclusion, even when no tax is due.
• Keep records of all annual exclusion gifts (canceled checks, account statements showing transfers).
• Document the value of each gift, particularly for non-cash gifts that require appraisals.
• Save records for the donor's lifetime plus the period required for estate tax filings (potentially decades).