The tax code provides three ways to make tax-free gifts. Increase your family’s after-tax wealth by using these methods to the extent they fit your estate and family situation.
The first tax-free giving method is the annual gift tax exclusion. In 2021, the exclusion limit is $15,000 per recipient, and it rises to $16,000 in 2022. The exclusion covers gifts you make to each recipient each year. Therefore, a taxpayer with three children can transfer $45,000 to the children every year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there is 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.
Note: This discussion is not relevant to gifts made to a spouse because these gifts are free of gift tax under separate marital deduction rules.
If you are married, a gift made during a year can be treated as split between you and your spouse, even if the cash or gift property is actually given by only one of you. Thus, by gift-splitting, up to $30,000 a year can be transferred to each recipient by a married couple because of their two annual exclusions. For example, a married couple with three married children can transfer a total of $180,000 each year to their children and to the children’s spouses ($30,000 for each of six recipients).
Education and medical gifts are the second method of tax-free giving. There’s no limit on the amount of tax-free gifts that can be made for qualified education or medical purposes.
To be tax-free, education gifts must pay for direct tuition costs and not for items such as books, supplies, board, lodging, or other fees. The gifts must be made directly to an education institution, not as reimbursements to the student or parents.
The gifts can be made on behalf of any individual, regardless of his or her relationship to you, and for any level of education.
Medical gifts also must be made directly to the medical care provider to qualify for the unlimited gift tax exclusion. Payments for any items that would qualify as deductible itemized medical expenses on an individual income tax return qualify for tax-free medical gifts.
The third method of tax-free giving is by utilizing the lifetime exemption amount. Any gifts you make during life that exceed the annual exclusion and don’t qualify as tax-free medical and education gifts count against your lifetime exemption. In 2021 is $11.7 million and will be $12.06 million in 2022. In a married couple, each spouse has a separate exemption. To the extent your lifetime exemption isn’t used by lifetime gifts, the remainder is used to reduce estate taxes.
As you’re aware, there are proposals in Congress to reduce the lifetime exemption. Even if none of these proposals is enacted, the current exemption amount is scheduled to be cut in half after 2025 when the 2017 tax law expires.
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