In 2022, the annual gift tax exclusion rose from $15,000 to $16,000. This means that you can gift $16,000 to an unlimited number of people without having to file a gift tax return and without reducing your lifetime exclusion against gift or federal estate tax.
That’s a lot to consider. For most people, they know they can gift $16,000 a year without paying gift tax.
Since I’ve been practicing elder law—over twenty years now—the question I most frequently here is, “How much can I gift without paying gift tax?” or a derivative of this question, such as “I heard I could gift [insert amount here … $10,000, $15,000] without paying gift tax. Is that right?” What bothers me about this question isn’t the question itself, it’s the tremendous amount of misconception behind the question that is difficult, if not impossible, to unravel and to disabuse the person of.
If you have more than $10,000,000 in assets, you are officially in the top 1% of America’s socio-economic stratum. In short, you are really rich. America is a wealthy society, and 99% of American society has less wealth than those Americans who own more than $10,000,000 in assets. I have had thousands of clients over the course of my career and very, very few of my clients have had more than $10,000,000 in assets.
There is a federal gift and estate tax. The tax is a unified tax. Certain gifts that you make during your lifetime reduce the amount your estate can pass free of estate tax. Most every American taxpayer receives a lifetime credit against federal gift and estate tax of $12,060,000. In short, a person would have to gift more than $12,060,000 before he would ever pay gift tax. A married couple can shelter double that amount or $24,180,000 from gift tax.
Given the fact that only 1% of Americans own more than $10,000,000, how many do you think own more than $12,060,000? More than $24,180,000? .01%? Fewer? Furthermore, how many people are worth so much more than $24,180,000 that they are willing to make a lifetime gift of $24,180,000? Remember, if I gift the money, I no longer own the money, and if I am making a gift (as opposed to leaving the money to another person after I die), I’m still alive. When someone is alive, they need to live and money helps with living. I can’t speak for everyone, but if I were going to gift $24,180,000, I better have enough money remaining in my name after the gift that I can continue to live the affluent lifestyle to which I am most assuredly accustomed to living. I must have more than $50,000,000. How many people do you think have more than $50,000,000? .001%?
My point is, it is more accurate to say that no one pays gift tax then it is to talk about how much a person can gift without paying gift tax. While that statement isn’t necessarily true, it is true so often that to talk about the few times that it’s inaccurate is simply distracting.
What is the $16,000 annual exclusion about then? If you thought you could only gift $16,000 a year (or insert whatever number you thought here) without paying gift tax, you are in the majority, not the minority. But the $16,000 is only part of the rule. The entire rule is, a person can gift $16,000 a year to an unlimited number of people without reducing his $12,060,000 lifetime exclusion.
If a person gifted $17,000 in a year, his life time exclusion would decrease from $12,060,000 to $12,059,000, but until you gift more than $12,060,000, there is no circumstance under which you are going to pay gift tax. Once again, a married couple could gift twice that amount or $24,180,000 before they would pay gift tax.
As the lifetime credit against gift tax has risen over the past twenty years (from around $1,000,000 to its current lofty heights of $12,060,000), the gift tax has become more and more irrelevant. If you do not own more than $12,060,000 (or $24,180,000 for a married couple), then my advice to you would be, Stop worrying about the gift tax. It doesn’t affect you. There are many other issues with which to concern yourself. Gift tax isn’t one of those issues.