As legislators propose reducing the estate and gift tax exemption and changing estate tax laws, you may want to make tax-free gifts this year to reduce your taxable estate.
Near the end of the year, many people choose to give cash or stock to family members and other loved ones. With the annual gift-tax exclusion, giving can also help reduce the size of your taxable estate, within generous limits and without triggering estate or gift taxes. For 2021, the exclusion amount is $15,000.
The exclusion covers gifts you make to each recipient each year. A taxpayer with three children, for example, can transfer $45,000 in total to the children every year free of federal gift taxes.
If the only gifts made during a year are excluded this way, there’s no need to file a federal gift tax return.
If annual gifts exceed $15,000, the exclusion covers the first $15,000 per recipient, and only the excess is taxable.
In addition, even taxable gifts might not result in gift tax liability due to the unified credit, described below. Note: This discussion isn’t relevant to gifts made to a spouse, which are free of gift tax under separate marital deduction rules.
Gift-splitting
If you’re married, a gift you make during the year can be treated as split between you and your spouse, even if the cash or gift property is given by only one of you. With gift-splitting, a married couple can transfer up to $30,000 per year to each recipient because of their two annual exclusions.
As an example, a married couple with three married children can transfer $180,000 in total each year to their children and to the children’s spouses — that is, $30,000 for each of six recipients.
Both spouses must consent to gift-splitting. The consent should be indicated on the gift tax return(s) filed by the spouses. The IRS prefers that both spouses indicate their consent on every return filed.
Because more than $15,000 is being transferred by a spouse, a gift tax return(s) does have to be filed, even if the $30,000 exclusion covers total gifts. TrueBlaze Advisors can prepare the gift tax return(s) for you.
‘Unified’ credit for taxable gifts
Even gifts that aren’t covered by the exclusion, and are therefore taxable, may not result in a tax liability. The reason? A tax credit wipes out the federal gift tax liability on the first taxable gifts you make in your lifetime, up to $11.7 million for 2021. To the extent you use this credit against a gift tax liability, however, it reduces or eliminates the credit available to be used against the federal estate tax at your death.
Gifts made directly to a financial institution to pay tuition or to a healthcare provider to pay for medical expenses on another person’s behalf do not count toward the exclusion. For example, this year you could pay $20,000 to a college for your grandson’s tuition and still gift him up to $15,000.
Annual gifts help reduce your estate’s taxable value. Legislators in Washington are proposing ways to reduce the estate and gift tax exemption amount and modify estate tax laws. You may want to consider making large tax-free gifts to recognize and address this potential threat. It could help insulate you from any later reduction in the unified federal estate and gift tax exemption.
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