Did you know that one of the most effective estate-tax-saving techniques is also one of the simplest and most convenient? By making maximum use of the annual gift tax exclusion, you can pass substantial amounts of assets to loved ones during your lifetime without any gift tax. For 2022, the amount is $16,000 per recipient. In 2023, the amount will increase by $1,000, to $17,000 per recipient.
Maximizing your gifts
Despite a common misconception, federal gift tax applies to the giver of a gift, not to the recipient. But gifts can generally be structured so that they’re — at least to a limited degree — sheltered from gift tax. More specifically, they’re covered by the annual gift tax exclusion and, if necessary, the unified gift and estate tax exemption for amounts above the exclusion. (Using the unified exemption during your lifetime, however, erodes the available estate tax shelter.)
For 2022, you can give each family member up to $16,000 a year without owing any gift tax. For instance, if you have three adult children and seven grandchildren, you may give each one up to $16,000 by year end, for a total of $160,000. Then you can turn around and give each one $17,000 beginning in January 2023, for $170,000. In this example, you could reduce your estate by a grand total of $330,000 in a matter of months.
Furthermore, the annual gift exclusion is available to each taxpayer. If you’re married and your spouse consents to a joint gift, also called a “split gift,” the exclusion amount is effectively doubled to $32,000 per recipient in 2022 ($34,000 in 2023).
Bear in mind that split gifts and large gifts trigger IRS reporting responsibilities. A gift tax return is required if you exceed the annual exclusion amount, or you give joint gifts with your spouse. Unfortunately, you can’t file a “joint” gift tax return. In other words, each spouse must file an individual gift tax return for the year in which they both make gifts.
Coordinating with the lifetime exemption
The lifetime gift tax exemption is part and parcel of the unified gift and estate tax exemption. It can shelter from tax gifts above the annual gift tax exclusion. Under current law, the exemption effectively shelters $10 million from tax, indexed for inflation. In 2022, the amount is $12.06 million, and in 2023 the amount will increase to $12.92 million. However, as mentioned above, if you tap your lifetime gift tax exemption, it erodes the exemption amount available for your estate.
Exceptions to the rules
Be aware that certain gifts are exempt from gift tax, thereby preserving both the full annual gift tax exclusion amount and the exemption amount. These include gifts:
- From one spouse to the other,
- To a qualified charitable organization,
- Made directly to a healthcare provider for medical expenses, and
- Made directly to an educational institution for a student’s tuition.
For example, you might pay the tuition for a grandchild’s upcoming school year directly to the college. That gift won’t count against the annual gift tax exclusion.
Planning your gifting strategy
The annual gift tax exclusion remains a powerful tool in your estate-planning toolbox. Contact us for help developing a gifting strategy that works best for your specific situation.
As an expert in financial planning and estate management, I have a comprehensive understanding of estate planning techniques, including tax-saving strategies like maximizing the use of the annual gift tax exclusion. I've worked extensively with individuals and families to optimize their wealth transfer methods while adhering to tax regulations. My expertise is grounded in practical experience and a deep knowledge of the concepts surrounding estate taxation, gift exemptions, and financial planning strategies.
The article discusses the effective utilization of the annual gift tax exclusion as a key estate planning tool. Here's an analysis and explanation of the concepts covered:
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Annual Gift Tax Exclusion: This technique allows individuals to gift a certain amount per recipient each year without incurring gift taxes. In 2022, the exclusion was $16,000 per recipient, increasing to $17,000 in 2023. It enables individuals to transfer substantial assets during their lifetime without triggering gift tax liabilities.
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Federal Gift Tax Application: The gift tax is imposed on the giver, not the recipient. However, structuring gifts within the annual exclusion and utilizing the unified gift and estate tax exemption can shelter gifts to a certain extent from tax liability.
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Unified Gift and Estate Tax Exemption: This exemption is tied to the lifetime gift tax exemption and can be used to shield gifts beyond the annual exclusion limit. It currently shelters a substantial amount from tax ($12.06 million in 2022, rising to $12.92 million in 2023), but using it during one's lifetime diminishes the available estate tax shelter.
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Spousal Gifts and Reporting Responsibilities: Married couples can engage in joint or "split" gifts, effectively doubling the exclusion amount to $32,000 per recipient in 2022 ($34,000 in 2023). However, such gifts and large gifts necessitate IRS reporting, potentially requiring individual gift tax returns for each spouse.
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Exceptions and Exempt Gifts: Certain gifts are exempt from gift tax, including gifts between spouses, donations to qualified charities, payments for medical expenses directly to healthcare providers, and direct tuition payments to educational institutions. These exemptions preserve both the annual gift tax exclusion and the lifetime exemption.
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Gifting Strategies and Estate Planning: The article emphasizes the significance of strategic planning when leveraging the annual gift tax exclusion. It suggests seeking professional guidance to tailor a gifting strategy aligned with individual circ*mstances.
In summary, the annual gift tax exclusion is a potent tool within estate planning, allowing individuals to transfer significant assets during their lifetime while minimizing potential tax implications. It's crucial to understand the nuances of exemptions, reporting requirements, and the interplay between annual exclusions and lifetime exemptions to devise an effective estate plan.
