It’s December, the time of year when many of think about giving gifts to people and causes straight out of our checkbooks. We have written or talked about gifting the past couple of years (2019 and 2020). Still, it’s worth revisiting because the details are often misunderstood and things change. Let’s start with:
The $15,000 Limit
You have heard that you can gift $15,000 per year without incurring tax. That’s true. The rule, however, applies only to gift and estate tax. For 2021, this tax is due only for people who die with estates valued at more than $11.7 million (and, for married people, twice that). Certain gifts are not counted in that $11.7 million limit. The $15,000 annual exclusions are one of them. (It’ll be $16,000 in 2022, thanks to inflation.)
If you go over $15,000, you start tapping into your total lifetime limit. You are then supposed to file a gift tax return to alert the IRS that you’ve used some of your allotment. So, even if you write a check to your daughter for $300,000 this year, no tax would be due; you’d still have $11,415,000 (for now) to give. The recipient wouldn’t owe tax either.
Note that $15,000 is only a per-person a limit, not a total annual cap. You can give $15,000 to as many people as you wish without reducing your lifetime limit. If you have three kids, you can give each one $15,000, not just $5,000 each. And excluded gifts are is not limited to children or family members. If you are married, you and your spouse can give to the same person. Together, you can give $30,000 to your son, daughter-in-law, all of their kids, your neighbor, all of their kids, and so on. But if you give $20,000 to one of them, you’ve used $5,000 of your lifetime limit, and should tell the IRS by filing a gift tax return.
Giving Gifts: Other Concerns
There are other types of gifts that don’t count toward your lifetime limit, including gifts to your spouse (so long as he or she is a citizen); someone else’s tuition, if paid to the institution directly; and someone else’s medical expenses, if paid to medical facilities directly. These can be made in any amount, and they won’t count against your lifetime limit.
For people who have some wealth but who are not currently in the “taxable” zone, planning around estate and gift tax can be a challenge. That’s because a person’s total limit is the one on the date of death. Most of us have no idea when that will be or what the limit will be at that time.
For 2022 the gift and estate tax exemption will be $12.06 million ($24.12 million if you are married). However, there were serious proposals in Congress that would have dramatically reduced the limit this January. That didn’t happen, but the exemption will automatically decrease to $5 million (adjusted for inflation) in 2026.
So, if you were to give away that $300,000 this year, and you live past 2026, instead of having more than $11.4 million left, you’d suddenly have about $4.7 million. To take advantage of the current high exemptions, you’d have to give away the upper limit. The federal government has indicated that the IRS will not “claw back” gifts made during this period of high gift and estate tax exemptions. So if you have a large estate, you may want to seriously consider major gifting before the exemption drops. There are many planning techniques available, and we strongly recommend getting advice from tax and estate planning professionals.
Watch the Calendar
When giving gifts in order to reduce the size of your estate, timing is important. The asset must be removed from your estate – the check cashed – by the end of the year. An ordinary check is not the best gift for under the tree – unless you run the recipient by the bank before New Year’s. If you are running short on time, opt for cashier’s checks or direct transfers.
If you give to charity, there’s good news this year. Because of the pandemic-related CARES act, the income tax charitable deduction rules are more generous. Typically, people who take the standard deduction can’t deduct charitable gifts, but this year they can. There’s a $300 deduction for single filers, and $600 for married filing jointly. What’s more, if you do itemize, you can deduct cash gifts of up to 100% of your adjusted gross income.
Sometimes Surprising Consequences
For those of us with more modest estates, the $15,000 annual exclusion amount is mostly meaningless. We can give more without worrying about paying tax. But it’s important to consider whether that’s wise. Giving less or not at all is always an option. Ask yourself. Could I need the money some day? If the answer is yes, give your love and kindness and leave your checkbook on the shelf.
Also consider whether you or your spouse might need long-term care in the next five years. If you have no reserve to pay for care and intend to rely on public benefits, gifts to others will hurt you. To qualify for Medicaid (ALTCS in Arizona), gifts in the prior five years must be disclosed, and a penalty will be assessed for gifts made. The $15,000 exclusion gifts, gifts of tuition, medical expenses, and any other gifts count against a Medicaid applicant. Removing assets from your estate by simple gifting will not help you qualify for benefits, unless the giving is done well before the need.
The rules that govern giving gifts are often misunderstood. Right now, the $15,000 limit is relevant to only the very wealthy, but that could change. If you have any anxiety about your situation, consult your tax, financial, and/or estate planning advisors.