Every year the IRS sets the annual gift tax exclusion, allowing you to give up to a certain amount tax-free. Here’s the latest you need to know as you plan your finances heading into the New Year.
What is the annual gift tax exclusion for 2022?
For the past four years, the annual gift tax exclusion — or the amount of money or assets you’re able to transfer to another person without incurring a gift tax — has been $15,000. However, the IRS just announced an increase to a new high exclusion amount of $16,000 per recipient. The reason? Inflation.
For gifts exceeding more than $16,000 per recipient in 2022, the overage would be subtracted from your lifetime gift and estate tax exemption. Note that this annual gift tax exclusion amount is per individual taxpayer, so if you have a spouse, you can plan to give a total of $32,000 per recipient in the coming year.
Here’s an example: If you and your spouse have two children and four grandchildren, you may give $128,000 ($32,000 per recipient) to these descendants without dipping into your lifetime exemption.
Did the lifetime exemption increase for 2022?
The lifetime gift tax exemption was also increased for 2022, going from $11.78 million for individuals to $12.06 million ($24.12 million per couple). This allows for an additional $720,000 to be gifted without paying the gift tax. (Put 2026 on your calendars: This is the year that the lifetime exemption is scheduled to be sliced in half.)
How do gifts to spouses work?
Spouses who are both U.S. citizens can transfer money or assets to each other in unlimited amounts, for the most part, without having to pay gift tax. However, gifts to a spouse who is not a U.S. citizen are limited to an annual exclusion amount of $164,000. This is an increase over the previous amount of $159,000 in 2021.
What counts as a gift?
The IRS considers a gift to be any money or asset for which you don’t expect to receive fair payment. You may give (or transfer) everything from cash and investments to real estate and both tangible and intangible assets. Interest-free loans also qualify.
When does the gift tax kick in?
If you exceed both the lifetime and annual exclusions with your generosity, you may be required to file a gift tax return and pay the tax. The gift tax rate starts at 18% and caps out at 40%, and exactly what your rate will be depends upon the amount you exceed your annual exclusion in a given year. It also depends on the value of the taxable gift. Consult with your tax professional to help you manage the impact of these and other taxes.
Would you like to know more about the most tax-efficient financial strategies? Our tax advisors help you with essential tax services and planning, as well as ways to minimize the impact of taxes on your overall financial situation. Contact us today.