Annual Gift Tax Exclusion: Use It or Lose It

Dec 6, 2022
Tax Planning
Annual Gift Tax Exclusion - Use It or Lose It | AmeriEstate Legal Plan

As the year winds down, it’s time to think about your 2022 estate planning strategies for reducing taxes. One of the simplest ways to do this is to make use of your annual gift tax exclusion. For 2022, the amount of your annual gift tax exclusion is $16,000 for an individual and $32,000 for a married couple making a joint gift.

Exclusion Versus Exemption

Some people get confused between their annual gift tax exclusion, lifetime estate and gift tax exemption. In order to reduce your taxes, it is important to know the differences between these.

Your annual gift tax exclusion is the amount of money that you, or both you and your spouse, can give to a person each calendar year without having to pay a gift tax. You can give this excludable gift to as many people as you wish. For any year in which you choose not to make one or more excludable gifts, you lose the exclusion for that year.

Your lifetime estate and gift tax exemption, on the other hand, is the amount that you, or both you and your spouse, can give or transfer to someone else during your lifetime free of the federal estate or gift tax. For 2022, this amount is $12.6 million for an individual and $24.12 million for a married couple.

How the Annual Exclusion Works

If you’re wanting to help your adult children start a business, using the annual exclusion to do so is a savvy strategy that benefits both you and them. How so? Not only can you give each child $16,000 (or $32,000 if you and your spouse make a joint gift) tax free, but each such gift reduces your estate by a corresponding amount that can, over the course of your lifetime, substantially reduce the value of your estate to below the amount where the federal estate rate kicks in.

In addition, neither you, if you’re making an individual gift, nor any of your gift recipients needs to file a gift tax return. Joint marital gifts, called “gift splitting”, require you and your spouse to file a gift tax return, but this is only for informational purposes. Neither of you will owe  gift taxes.

If any of your gifts exceeds the exclusion amount, you, or you and your spouse, must report each excess amount to the IRS by filing a gift tax return. Again, however, you owe no gift taxes because you can deduct the excess amount from your lifetime exemption.

Other Tax-Free “Gifts” You Can Make

Keep in mind that in addition to the outright gifts you can make tax free, you also pay no taxes or touch your lifetime exemption whenever you do any of the following:

  • Pay someone’s medical bills
  • Pay a student’s tuition bills
  • Make a charitable contribution to an exempt organization

Getting Expert Advice

If you’d like more information about your annual gift tax exclusion or any other aspect of estate planning, contact AmeriEstate Legal Plan, Inc. We are a national network of estate planning attorneys and other professionals who would be happy to help you.