Gift Tax Exclusion Can Be a Powerful Planning Tool
By Bennett Allison, CPA and Gabriela Mandiuc, CPA
The annual gift tax exclusion increased in 2022 from $15,000 to $16,000. The IRS officially announced the increase in Revenue Procedure 2021-45.
While the change is relatively minor and only reflects annual inflation adjustments, it reminds us what a powerful planning tool the gift tax annual exclusion can be. It’s also worth reconsidering the timing of annual gifting. For example:
- A married couple with two children (each with spouses) and four grandchildren could gift $256,000 per year with no gift and estate tax consequences. That is, $16,000 gifted by each spouse (times 2) to eight beneficiaries (times 8).
- The $256,000 per year over a multi-year period adds up quickly. For example, over a five year period, gifts of $256,000 each year reach $1.28 million.
- No complex gift and estate planning are required. It’s as simple as cutting checks to each beneficiary for the $16,000.
- When to give? Most taxpayers wait until the end of the year. This may not be advisable, especially with elderly taxpayers. Instead, gifting at the beginning of the year will ensure that the annual exclusion gets used each year.
Consider the following if $256,000 is gifted on January 1 using the annual exclusion: The married couple dies on January 30. Assuming the couple was in a taxable estate situation, they save $102,400 in estate taxes ($256,000 x 40 percent estate tax rate) by gifting early in the year. That is, the current year gift tax annual exclusion would no longer be available after their deaths.
Often, “just making gifts” is not that simple. You may worry about what happens to property after being gifted. There may be concerns about in-laws receiving gifted property now or in the future. In some cases, children and future generations have their own gift and estate tax issues, and receiving property outright just exacerbates the problem.
All of these challenges can be overcome within the confines of annual gifting. But addressing them, unfortunately, increases the time, expense, and complexity of the planning.
Every individual has unique needs, and the professionals at Sol Schwartz & Associates are here to guide you through the process.
For more information regarding the new gift tax exclusion, email Bennett Allison, cba@ssacpa.com, Gabriela Mandiuc, gam@ssacpa.com, or contact anyone at Sol Schwartz & Associates at 210.384.8000.
