Conveniently enough, one of the most effective ways to save on your estate taxes is also one of the simplest: when you use the annual gift tax exclusion, you can transfer assets to loved ones without any gift tax.
While the current gift tax exclusion amount is $16,000 per recipient in 2022, that amount will increase by $1,000 in 2023.
Making the most of your gifts
While it’s commonly misconceived that the onus of the federal gift tax is on the recipient of the gift, the reality is that these taxes are generally owed by the giver. That said, gifts can be structured so that they’re excluded from gift tax (and, if necessary, unified gift and estate tax).
In 2022, you can gift each family member up to $16,000 without owing gift tax. In 2023, that amount will increase to $17,000. If you gift your children and grandchildren up to $16,000 before December 31, you can then gift them each an additional $17,000 beginning in January—significantly reducing your estate in a matter of months.
This annual gift tax exclusion is available to each taxpayer. For those who are married and whose spouse consents to a joint gift, or “split gift,” the exclusion amount is effectively doubled.
If you exceed the annual exclusion amount, you will need to file a gift tax return. Note that even if you give joint gifts with your spouse, you must each file individual gift tax returns.
Lifetime gift tax exemption
As part of the unified gift and estate tax exemption, the lifetime gift tax exemption can shelter gifts above the annual exclusion amount from taxation. The current amount is $12.06 million, and that amount will increase to $12.92 million in 2023.
That said, if you tap into your lifetime gift tax exemption, the exemption amount available for your estate will be eroded.
Gift tax exceptions
Some gifts are exempt from gift tax, including gifts given:
- From one spouse to another
- To a qualified charitable organization
- To a healthcare provider for medical expenses
- To an educational institution for tuition
These exemptions preserve both the full annual gift tax exclusion amount and the exemption amount, and won’t count against the annual gift tax exclusion.
Plan your gifting strategy with us
Not sure how to get the most out of the annual gift tax exclusion for your estate planning? Contact us to work with a knowledgeable advisor and develop a powerful strategy that works for you.