We’re closing in on the end of 2021, and it’s a time when many people consider making year-end gifts to charities and family members. When you transfer cash or other assets to someone else, it may be subject to the federal gift tax if the value exceeds the annual gift tax exclusion. Gift tax rates range from 18% to 40% depending on the size of the gift, so it’s a good idea to be aware of the rules so you don’t inadvertently trigger the tax.
Gift Tax Exclusion Amounts
In 2021, the annual gift tax exclusion amount is $15,000, and increases to $16,000 in 2022. That means that in 2021 you can gift up to $15,000 to multiple people without incurring the tax. For instance, if you have two children and four grandchildren, you could give away $90,000 in 2021 and as long as anyone person doesn’t receive more than $15,000, there’s no tax impact.
In addition, each spouse has their own gift tax exclusion, so using that same example, a married couple could give away $180,000. This strategy is known as “gift splitting” (see more information later in this article). These gifts not only make family members happy but can also reduce the size of the couple’s taxable estate . . . which brings us to estate tax rules.
Estate Tax Thresholds
The “unified federal estate and gift tax exemption” is the total amount you can give over your lifetime without incurring gift tax (though the annual limits still apply). This amount, like the gift tax exclusion, is adjusted for inflation:
In 2021, estates up to $11.7 million ($23.4 million for married couples) can transfer to heirs without being subject to estate tax. In 2022, these numbers increase to $12.06 million for individuals and $24.12 million for married couples.
Note – in 2026, the unified exemption is set to fall to $6 million/$12 million for married couples unless Congress acts before that to increase these amounts.
Coordination Between Gift Tax and Estate Tax
If you give your child $50,000 this year (as an individual), $35,000 of that gift exceeds your $15,000 annual gift tax exclusion. This means you’ll need to file a gift tax return, but you won’t incur a gift tax, because the excess amount will spill over into your lifetime exclusion amount. Any gifts you give to one person that exceed the annual gift tax exclusion chip away at your lifetime exclusion amount.
Should You File a Gift Tax Return?
If your gifts are less than the annual limit, you’re not required to file a gift tax return. However, if you and your spouse elect gift splitting, both spouses must file their own individual gift tax return unless one of the following two exceptions applies:
- Only one spouse made any gifts during the calendar year, those gifts did not exceed $30,000 to anyone recipient, and all gifts were of present interests
- Only one spouse made gifts of more than $15,000 but not more than $30,000 to any recipient, the only gifts made by the other spouse were not more than $15,000 and made to recipients other than those to whom the first spouse made gifts, and all gifts made by both spouses were of present interests.
In those situations, only one spouse (the “donor spouse”) must file a gift tax return and the other spouse (the “consenting spouse”) would signify consent on that return.
Other Tax-Free Gifts
Here are some items generally not subject to gift tax:
- An unlimited amount can be gifted between spouses as long as they’re both US citizens. If one spouse is not a citizen, tax-free gifts are limited to $159,000 in 2021 and $164,000 in 2022
- Contributions to a political organization
- Medical and educational expenses paid directly to the appropriate institution. Be aware that if you make contributions to a 529 plan for college expenses over the annual gift tax amount, you will need to file a gift tax return to report that excess.
- Charitable donations made to a qualified nonprofit organization
More information is available in the instructions for IRS Form 709.