In this post, we are going to look at an important gift tax detail. However, to be able to understand the implications, you have to absorb some background information about federal transfer taxes.
Estate Tax Parameters
Most families do not have to be concerned about the federal estate tax, because there is an exclusion that can be used to transfer a certain amount tax-free. As it stands right now, it is higher than the value of the vast majority of estates.
To provide context, in 2017, the exclusion was $5.49 million. In December of that year, the Tax Cuts and Jobs Act was passed, and it was signed into law by the president. It established an $11.18 million exclusion for 2018, and this figure has been in place since then with annual inflation adjustments.
The exclusion in 2022 is $12.06 million, and it is a record high, but there will be some changes in the relatively near future.
At the end of 2025, the provision in the aforementioned piece of legislation that set the exclusion will expire. In 2026, the exclusion will go back down to the $5.49 million that was in place in 2017 adjusted for inflation.
While the vast majority of American estates will be exempt, our clients live in a very desirable place. There are many high net worth individuals in the Hilton Head area, and the median home value is $700,000, so it is a factor for some people in our community.
2022 Annual Gift Tax Exclusion
Now that we have set the stage appropriately, we can move on to the subject at hand. The estate tax was established in 1916, and at that time, people used to give gifts while they were living to avoid the tax.
This was possible until 1924 when a gift tax was enacted to close the loophole. It was repealed in 1926, and six years after that, it was reenacted. The federal gift tax has been in place continually since then, and it is unified with the estate tax.
The multimillion dollar exclusion that we have looked at is a unified exclusion that applies to large lifetime gifts and estate transfers, but it is not the only gift tax exclusion.
There is a separate gift tax exclusion that can be used to give annual tax-free gifts to any number of people as long as a single gift does not exceed a certain amount. Each year, the IRS can increase the amount of this exclusion to account for the cost of living.
People that are exposed to the estate tax use the annual gift tax exclusion to help mitigate their exposure, so increases are always welcome. It was stagnant for several years, but there has been an increase. The annual exclusion went from $15,000 to $16,000 for 2022.
There is also a medical exclusion that can be utilized to pay health care bills for others free of taxation. This exclusion extends to the purchase of health insurance for the benefit of other people.
In addition to the medical exclusion, we have an educational gift tax exclusion in the United States. You can pay school tuition for others in a tax-free manner, but it is a tuition-only exclusion that does not apply to living expenses, books, and fees.
Of course, you could use your annual exclusion to provide additional support, and a married couple could give as much is $32,000 annually to any number of gift recipients.
We Are Here to Help!
You can rely on our firm if you have concerns about the estate tax, and of course, we provide personalized attention to people that are not exposed to this tax.
If you are ready to schedule a consultation with the Hilton Head estate planning lawyer, call us at 843-815-8580. We also have a contact form on this site you can fill out if you would prefer to send us a message.