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January192022

New Year, More and Bigger Gifts

Kevin Wong, CPA

01.19.22 | T&E Chat

The new year is here, and it brings along some changes. Like some of you, I have decided to make a few changes. A part of my New Year’s resolutions, though cliché, is to exercise, eat healthier, and travel more. However, not all of my resolutions are related to lifestyle changes. Some are economic changes. I would like to make gifts to my loved ones this year. But how much can I give now that we’re in 2022?

Lifetime Estate and Gift Tax Exemption

The lifetime gift tax exemption is the amount that a taxpayer can give throughout their lifetime without triggering gift taxes. The estate tax exemption is linked to the gift tax exemption. The use of a taxpayer’s lifetime gift tax exemption would decrease the amount of estate tax exemption available by the taxpayer’s estate at the time of death.

Since 2011, the IRS has increased the lifetime estate and gift tax exemption yearly due to inflation. The exemption has increased from $11.7 million in 2021 to $12.06 million in 2022. This is a $360,000 increase from the prior year. For a married couple, this brings the combined exemption to $24.12 million for 2022.

Annual Gift Tax Exclusion

A taxpayer can make gifts of a certain amount to each recipient per year tax-free without using their lifetime exemption. The annual exclusion has been $15,000 per year since 2018. However, the IRS has increased the annual exclusion to $16,000 for 2022. For married couples, this would mean they can collectively give $32,000 to each recipient.

The annual gift tax exclusion is a great estate planning tool for taxpayers. If a married couple has 10 descendants, they can give away $320,000 each year tax-free without using their lifetime exemption. Barring any annual inflation increases, this would mean the married couple could remove $3,200,000 tax-free from their estate after 10 years. Not only are the assets removed from the taxpayers’ estate, but any future appreciation from those assets would also avoid gift and estate taxes.

Gifts to a Non-US Citizen Spouse

Spouses who are both US citizens can generally transfer unlimited amounts between each other tax-free. However, when a gift is made to a non-US citizen spouse, only a limited amount per year is tax-free. A non-US citizen spouse may not be subject to US estate tax. This could potentially lead to the avoidance of US estate tax; thus, the IRS has set a limit on the amount of tax-free gifts the US citizen spouse can make to the non-US citizen spouse. For 2022, the annual gift tax exclusion amount for gifts made to a non-US citizen spouse is $164,000. Gifts in excess of this would be a taxable gift by the taxpayer.

Conclusion

The lifetime estate and gift tax exemption are set to be reduced by one-half starting in 2026. However, there have been discussions in Congress every year to reduce the exemption before 2026. Late last year, a provision in an early version of the Build Back Better Act would have accelerated the reduction by 3 years to 2023. This provision was ultimately removed in the final legislation. However, this does not mean that another attempt will not be made during 2022. Taxpayers with a sizeable estate should take this time to examine their financial condition and make use of the increased annual exclusion and lifetime exemptions to reduce their taxable estate. Please speak with your tax and estate advisors to discuss how this may affect you.

Questions? I can be reached at 212.331.7441 | kewong@berdonllp.com or contact your Berdon advisor.

Kevin Wong is a Senior Manager in the Personal Wealth Services Group of Berdon LLP with nearly 10 years of professional experience. He works closely with high net worth individuals on matters involving their personal income tax, family businesses, and fiduciary, gift and estate taxes.

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