Annual and Lifetime Gift Tax Exclusions Primer

As the year-end approaches, it’s essential to start tax and gift planning efforts. There are several nuances to current federal rules when it comes to gift tax exclusions. Here are some of the most notable details you everyone needs to know:

For 2020 the annual federal gift tax exclusion per individual is $15,000. The annual federal gift tax exclusion allows individuals to give away up to $15,000 to other people without those gifts counting against the lifetime exemption.

Under the most recent rules, the annual gift tax exclusion is indexed for inflation. Which means fixed increments of $1,000 can adjust the exclusion.

The Tax Cuts and Jobs Act established exemption thresholds for the federal lifetime estate and gift tax exemption. For 2020, the lifetime gift tax exclusion per individual is $11.58 million. It means that people can give up to $11.58 million in gifts throughout their lifetime without ever having to pay gift tax on it. For married couples, both spouses get an $11.58 million exemption. It means that married couples can give away a total of $23.16 million before paying the gift tax.

An example, a married couple wants to make a gift to their son, who is also married. They can each give $15,000 to their son and the son’s spouse (so $60,000 in total) without triggering any estate tax.

Another example, if an individual has an estate with a market value of $30 million when they pass. If their spouse is a sole inheritor, the spouse is covered by unlimited marital deduction, and the estate tax doesn’t apply to inherited assets. However, this doesn’t translate to other beneficiaries after the spouse passes. So, their children, for example, would eventually owe estate tax if the estate exceeds the exclusion limit.

Unfortunately, gifts to trusts are generally not eligible for the annual exclusion. However, gifts to a 529 plan are excluded. The IRS also allows taxpayers to front-load several years of 529 plan donations into a single year. A donor can front-load five years’ worth of annual exclusion gifts into a single year’s contribution to a 529 plan.

For example, a parent or a grandparent could contribute up to $75,000 in one year to their child/grandchild without using any of the lifetime exemptions. Their spouse can do the same to superfund the 529 account.

In addition to federal estate taxes, 13 other jurisdictions in the United States impose estate taxes. They are Connecticut, DC, Hawaii, Illinois, Main, Massachusetts, Maryland, New York, Oregon, Minnesota, Rhode Island, Vermont, and Washington.