The federal estate tax was established in 1916, and at that time, people would give gifts while they were living to avoid the tax. This worked until 1924, but at that time, a gift tax was enacted to close the window of opportunity. It was in place for two years, and it was repealed.
Once again, gift giving was an option to sidestep the estate tax, but the gift tax was reenacted in 1932. We have had a gift tax since then, and it is now unified with the estate tax. In this post, we are going to share five things that you should know about the federal gift tax.
There is a unified gift and estate tax exclusion.
Most people do not have to pay the gift tax or the estate tax because there is a large, unified gift and estate tax exclusion. This is an amount that can be transferred before the tax would be levied on the remainder. In 2022, the exclusion is $12.06 million.
It is going down in 2026 when a provision in the Tax Codes and Jobs Act of 2017 expires. At the beginning of that year, it will revert to the $5.49 million that was in place in 2017 adjusted for inflation.
When you digest this information, you can see an opportunity that is available for the next few years. If your estate will be subject to taxation, you can give lifetime gifts before the exclusion goes down.
There is also an annual gift tax exclusion.
The multimillion dollar unified exclusion is not the only gift tax exclusion. There is also an annual $16,000 exclusion you can use to give gifts in a tax-free manner. You can give this much to any number of gift recipients within a calendar year free of taxation.
To be clear, you would not be utilizing any of your unified exclusion to give gifts tax free as long as no single gift to a particular person exceeds $16,000 in a year. Plus, there is no limit on the total amount as long as no one individual receives more than $16,000.
You can pay school tuition for others tax-free
There is another gift tax exclusion that applies to the payment of school tuition. If you decide to pick up the tab for tuition for a loved one (or anyone else), you are not taxed for your generosity. However, you have to pay the school directly, and this is a tuition only exclusion.
Books and fees are not included, and you cannot pay for living expenses under this exclusion tax-free. However, you can use your $16,000 annual exclusion to contribute toward these costs. Plus, if you are married, you and your spouse can give a total of $32,000 annually.
There is a medical exclusion as well.
If you want to step up to the plate to pick up medical bills for someone, the action will be tax-free. Once again, you cannot give the money to the individual with the understanding that they will use it to pay the bills. You must pay the provider directly. This exclusion extends to the payment of health care insurance premiums for other people.
We can help you use gift giving to your advantage.
Attorney S.J. Khalsa can help you implement an estate tax efficiency strategy if transfer taxes are going to be a source of concern. You have until 2026 to divest yourself of assets while the estate tax exclusion is at record high, and direct gift giving is not the only option.
Certain types of trust can be beneficial, and you can use the higher unified exclusion to fund trusts in a tax-free manner. The $16,000 per year, per person exclusion can be utilized to convey resources into a tax efficiency trust as well.
You should also be concerned about the potential impact of the New York State estate tax. In 2022, the state level exclusion is $6.11 million. There is no gift tax on the state level, but large gifts that you have given within three years of your passing are considered to be part of your estate for tax purposes.
If you are ready to work with our Manhattan, NY estate planning lawyer to put a plan in place, call us at 212-973-0100. There is also a contact form on this site you can fill out if you would rather send us a message.