Annual gifting: taking advantage of annual exclusions

Understanding the available annual gift tax exclusion and other exclusions from gift tax is important when planning on the best use of your lifetime estate and gift tax exemptions. Many people are under the incorrect impression that they are not permitted to make gifts in excess of $16,000 per donee (the recipient) each year. Understanding the available exemptions will clarify and strengthen your confidence in making gifts during the year.

In 2022, each individual has a total exemption of $12,060,000 from lifetime gifts or estate tax at death. Gifts that exceed this amount will generally be subject to a 40 percent federal gift tax. That being said, the Internal Revenue Code does provide for an annual gift tax exclusion, currently $16,000 per donee.

This means that each person may give up to $16,000 per recipient each year without triggering a gift tax or using up a portion of their available exemption. Married couples, too, can agree to “split” their gifts to take advantage of both exclusions, meaning one spouse can make gifts of up to $32,000 per donee each year.

Aside from the annual gift tax exclusion, certain gifts are entirely exempt from gift tax. If a donor makes a gift for the benefit of any other person that is paid directly to a provider for tuition or deductible medical costs, those gifts, in any amounts, will be free of federal gift tax.

For example, D, who is married to F, made the following gifts in 2022:

$20,000 to child A as a wedding gift $450,000 to child B to purchase a new home $55,000 for college tuition for grandchild paid directly to Dartmouth College

All of the gifts exceed the $16,000 annual exclusion. Because D and F are married, they can agree to split all gifts in 2022.

The gift to child A is not taxable because it is less than the combined annual exclusion of $32,000.

The gift to child B is taxable; $32,000 will be excluded using the annual exclusion for both parents. The remaining $418,000 is taxable and each of D’s and F’s lifetime exemptions will be reduced by $209,000 with no gift tax due.

The $55,000 gift is not taxable because it falls within the special exclusion for tuition paid directly to a qualified educational institution.

While this is a brief overview of a few exclusions and exemptions from gift tax, there are others. An experienced attorney can help you determine the best way to implement, and manage the tax implications of, your gifting.

Christina Krakoff is an attorney in McLane Middleton’s Trusts & Estates Department where she advises clients in a variety of areas including estate planning, asset protection, estate, gift, income and generation skipping tax planning, and trust and estate administration. She can be reached at 603-628-1458 or christina.krakoff@mclane.com.

Christina Krakoff

900 Elm Street, Manchester, NH
603-625-6464
www.mclane.com