How Much Can I Give Away?
When we meet with clients it is not uncommon to hear someone say, I know I can only give away $15,000 each year. This statement comes from a common misunderstanding about gifting. There is no limit on the amount you can give away. There is only the question of whether the gift is taxable and whether taxes will be owed on the gift. The gift tax is a tax on transfers of money or property to other people while getting less than full value in return. Currently, the gift tax only applies to gifts that exceed $16,000 from an individual to another person in a single year. Gifts to charity do not count as a gift to a person. The $16,000 threshold is known as the annual exclusion amount. This gift is not taxable. There are other gifts, such as amounts paid for tuition or qualified medical expenses that don’t count toward this $16,000 amount and can increase the amount of annual tax-free gifting.
The lifetime gift tax exemption is the amount of taxable gifts a person can give away over his/her lifetime to any number of people without paying a gift tax. That amount is presently $12.06 million per person. So, for example, if you and your spouse give your son and his spouse $64,000 in 2022, you have not used any of your lifetime exemption. You have given $16,000 each to your son and his spouse ($32,000 combined) and your spouse has given $16,000 each to your son and his spouse ($32,000 combined). However, if you and your spouse give your son and his spouse $164,000 in 2022 you have given a taxable gift of $100,000. But no tax is owed because you will use $100,000 of your lifetime exemption. Assuming you have not given any other taxable gifts, your remaining lifetime exemption is now $11.96 million.
When you use any portion of your lifetime gift tax exemption, you have effectively reduced your remaining estate tax exemption at death by the same amount. The estate tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have an interest in at the date of death. This may consist of cash, securities, real estate, insurance, trusts, annuities, business interests and other assets. The total of all of these items is your "Gross Estate." Once you have determined the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your "Taxable Estate." These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify. After determining the Taxable Estate, taxable gifts that were given during your lifetime and not subject to taxation because of the lifetime gift tax exemption (beginning with gifts in 1977) are added to this number. So, if the Taxable Estate is $10 million, but taxable gifts of $2 million were given away during your lifetime, the actual Taxable Estate is actually $12 million.
Just a reminder, in 2010, Congress set the estate, gift, and generation-skipping transfer (GST) tax exemption amount at $5 million per person ($10 million per married couple), adjusted each year for inflation. In 2017, legislation temporarily doubled the exemption amounts to $10 million per individual ($20 million per married couple), adjusted each year for inflation. As indicated, the 2017 legislation is temporary. If nothing has been done to extend or make permanent the 2017 law by December 31, 2025, the exemption amounts will revert back to the amount under the 2010 law. In 2022, an individual may make $12.06 million, and a married couple may make $24.12 million, in lifetime or testamentary (at death) transfers without being subject to the 40% wealth transfer tax.
If you think your taxable estate may exceed the reduced exemption amount in 2026, you may want to consider using some of that lifetime gift exemption now so it doesn’t just disappear.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.