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.
© 2022
As an expert in estate planning and tax strategies, I bring a wealth of knowledge and experience to the table. I have a deep understanding of the intricacies of the tax code, particularly in the realm of gift and estate taxes. My expertise is not just theoretical; I have practical experience in helping individuals navigate the complexities of wealth transfer, ensuring they maximize tax-saving opportunities while complying with legal requirements.
Now, let's delve into the concepts used in the provided article on estate tax-saving techniques:
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Annual Gift Tax Exclusion:
- This is a powerful strategy that allows individuals to make gifts up to a certain amount each year without incurring gift tax.
- In 2022, the annual gift tax exclusion is $16,000 per recipient, and it increases to $17,000 per recipient in 2023.
- Despite the misconception, the federal gift tax applies to the giver, not the recipient.
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Maximizing Gifts:
- The article emphasizes the importance of maximizing gifts to loved ones within the annual gift tax exclusion limits.
- In the example provided, an individual with multiple family members can significantly reduce their estate by making full use of the annual exclusion.
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Unified Gift and Estate Tax Exemption:
- Gifts that exceed the annual exclusion may still be sheltered from gift tax by utilizing the unified gift and estate tax exemption.
- However, tapping into this exemption during one's lifetime reduces the available estate tax shelter.
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Joint Gifts and Split Gifts:
- Married individuals can consent to joint gifts, also known as "split gifts," effectively doubling the annual exclusion amount.
- It's important to note that split gifts and large gifts trigger IRS reporting responsibilities.
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Lifetime Gift Tax Exemption:
- Part of the unified gift and estate tax exemption, the lifetime gift tax exemption shelters gifts above the annual exclusion.
- The lifetime exemption is currently set at $12.06 million for 2022 and will increase to $12.92 million in 2023.
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Exceptions to Gift Tax:
- Certain gifts are exempt from gift tax, preserving the full annual gift tax exclusion and the exemption amount.
- Examples include gifts between spouses, donations to qualified charitable organizations, payments directly to healthcare providers for medical expenses, and payments directly to educational institutions for tuition.
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Gifting Strategy Planning:
- The article suggests that individuals should strategically plan their gifting to take advantage of the annual exclusion and other exemptions.
- Professional assistance is recommended to develop a gifting strategy tailored to each individual's specific situation.
In summary, the provided article highlights the importance of understanding and leveraging various gift and estate tax strategies to optimize wealth transfer while minimizing tax implications.
