If you’re thinking of gifting some of your money to loved ones, you may wonder: What is the gift tax limit in 2022? How much can I gift without owing the IRS money? In this blog post, we will explore the gift tax and how it works with other allowances (namely, the annual exclusion). We will also consider how and why some people choose not to use their federal exemption on every transfer.
What Is the Gift Tax Annual Limit in 2022, and What Happens If You Go Over It?
As of January 1, 2022, the gift tax limit in the United States is $16,000. If you give away funds over $16,000 to one person during the calendar year, you need to file a federal gift tax return. But you probably still won’t have to pay any tax!
The amount over your annual gift tax exclusion is simply deducted from your lifetime exclusion of $12,060,000, which is tracked on your gift tax return. For married couples, that amount is doubled.
The annual exclusion is also doubled for married couples, meaning you can gift up to $32,000 to any one person without using up the lifetime exclusion amount for either spouse. However, you will have to file a gift tax return to elect to split the gift.
Example: Lisa decides to give her son $40,000 toward a down payment on his new home in 2022. Her husband, Frank, elects to split the gift with her. Lisa will then file a 2022 gift tax return, and Frank will sign off that he elects to gift splitting, therefore splitting the total gift evenly as $20,000 per person. The total gift exceeds the married annual exclusion by $8,000, so $4,000 will be deducted against each of their lifetime exclusions of $12.06 million per person. Frank will also need to file a gift tax return to get Lisa’s gift-splitting permission since the total amount is over the annual exclusion. Were the total amount $32,000 or less, only Lisa would need to file the gift tax return.
On the rare occasion that a person has utilized their entire lifetime exclusion and continues making taxable gifts to their loved ones, the gifter is generally the person who pays the gift tax, not the recipient.
Use the Annual Gift Tax Exclusion to Your Advantage
If you want to gift money or property to your children or other family members and are worried about your estate being over your lifetime exclusion amount, only utilize the full annual exclusion. It will allow you to gift away tax-exempt funds every year to as many people as you want so long as you stay below the $16,000-per-person limit. It’s a great tool for passing on wealth to a new generation and allowing them to enjoy the money while you’re still here to see it.
Pay an Educational Expense Directly to an Institution
Other than your annual exclusion amount, you can help your friends and family tax-free by making medical or educational expenses directly to an institution.
For example, if your daughter is going to medical school and needs help with tuition, you can make the payment directly to the institution without incurring any tax or using any of your annual gift tax exclusion amount. It is important to note that the exclusion applies only to tuition payments (not room and board, supplies, or books), and it can impact financial aid.
If you want to help with college but limit the negative impact on financial aid, consider a 529 plan. It is subject to the same annual gift tax exclusion rules but has one useful exception: 529 plans allow for front-loading up to five years of gifts. You can super-fund the account at $80,000 per person without using any of your lifetime exclusion so long as you don’t make any other gifts to the same recipients during that period.
Pay a Medical Expense Directly to an Institution
Similar to education expenses, you can make medical payments directly to the institution on behalf of someone else without utilizing your exclusion. You will not have to file a gift tax return because it is not considered a gift. So, if you have a grandchild with expensive medical expenses coming up (hello, braces!) or a child who will soon have a large hospital expense for childbirth, consider helping them out by making payments directly to the medical provider.
Donate to Charity
Charitable donations are not subject to any of the same gift tax rules we’ve been reviewing. But, if you want to gift away funds outside of your friends and family for tax purposes or otherwise, charitable donations do provide a tax benefit. If you itemize your deductions, you’ll be able to deduct the donation (subject to limits) to reduce your taxable income and save you money at your marginal tax rate.
If you are over the age of 70.5. you can also make distributions directly from an IRA to a charitable institution without paying any income tax. This strategy is useful for those who need to reduce their adjusted gross income (AGI), such as to lower Medicare premiums. It is also useful for those who would otherwise not itemize their deductions and therefore wouldn’t receive a tax benefit for donating to charity.
Conclusion
While gifting away money or property worth over $16,000 might be a bit of a hassle, it’s very possible to do so without paying any gift tax! There are avenues you can take other than gifting directly to the person you intend to help that make the process even simpler. If you have any questions about giving strategies that aren’t touched on in this post, please don’t hesitate to reach out to our team!
Our Bethesda, MD financial planning firm incorporates clients’ gifting goals into their overall financial plan. To discuss how we can work together, schedule an introductory call.
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