11 Mar Annual Gift Tax Update: Justin Crain, Partner
Generosity is a wonderful attribute, yet there is some confusion regarding the “Gift Tax”. Have you heard that you could donate or give $15,000 (it used to be $10,000) each year without tax consequences? Many people are confused by this rule.
Unless you have gifted an extraordinarily large amount, it is unlikely that you will have to be concerned about paying any gift tax. As of 2020, you would have to gift more than $11,580,000 before any gift tax payment would be due.
What you may not know is that the $15,000 exclusion that many people have heard of is officially called the “Annual Gift Tax Exclusion.” This means that you can give up to $15,000 per year (per person you gift to) and not have to report the gift to the IRS – that gift is the maximum gift amount you can give per person per year excluded from gift tax. However, there is also a “Lifetime Gift Tax Exemption.” The Lifetime Gift Tax exemption is $11,580,000 for the year 2020. This means that if you gift more than $15,000 per year (per person you gift to), you have to report that amount over $15,000 to the IRS as a gift. Then, the total gifts reported in your lifetime is added up to see if you have gifted more than the Lifetime Gift Tax Exemption. If you have not gifted more than the Lifetime Gift Tax Exemption, there is no gift tax due!
It is also important to understand that currently, the Lifetime Gift Tax Exemption of $11,580,000 is part of the same total amount you can exempt from Estate Tax (what many people informally call the death tax). Restated, this means that to determine if there is a tax on gifts you make during your life, all of the gifts you made over $15,000 in one year (per person you gifted to) has to be added up and if that total amount is less than $11,580,000 during your life – no gift tax is due. THEN, after you have died, the value of everything being left to your survivors has to be added up. You combine the total gifts made during your life along with the total left after your death, and if that total is less than $11,580,000 – there is no estate tax due. The combination of Gift Tax and Estate Tax exclusion amounts is called “Unified Credit” in tax law (simply meaning they combined the life gifts and death gift totals against one exclusion amount). Simply stated, it means that no Gift or Estate Tax is due until a person gives away more than the total exemption amount, which is $11,580,000. If you are married, you can both claim the $11,580,000 for a total of $23,160,000.
What does this look like in real life? Here is an example:
Greg gifts $20,000 to each of his five children and to each of his ten grandchildren for Christmas in 2020 totaling $300,000. The law in 2020 says that you don’t have to report gifts of $15,000 or less (per individual person you’ve gifted to). So, for each child and grandchild receiving $20,000 – only $5,000 must be reported to the IRS. The amount over $15,000 that needs to be reported on IRS Form 709 for fifteen people (15*$5,000) is $75,000.
Reporting those gifts, however, does not automatically mean that Greg has to pay any tax. How can that be?! It is because the Lifetime Gift Tax Exemption amount in the year 2020 is $11,580,000. Greg, in this example, has only used $75,000 of his total $11,580,000 exemption which means that he can still gift $11,505,000 during his life before having to pay any Gift Tax!
How does this relate to the Estate T(death tax) that we often worry about? When Greg dies, the total amount of gifts made during his life is required to be added together with the gifts made after his death. If his lifetime gifts plus his gifts in death total $11,580,000 or less, there will be no Estate Tax. This means that if Greg dies after the gifts he made Christmas of 2020 without having ever given any more gifts, and his total estate remaining at his death was worth $1,000,000; his total estate value plus the lifetime gifts he made would total $1,075,000 – no leveraging of an Estate Tax necessary. Technically, Greg could have given away $10,505,000 more before any Gift or Estate Tax would have been owed.
Generosity never goes out of style. Want to leave a legacy of generosity or have an Estate Tax or Gift Tax questions? Comment below or contact us.