Attorney Burton discusses the new annual exclusion gift amount for 2022 in this video entitled - "How Much Can I Give Away Tax Free in 2022?" Watch this video to discover how much you can give away per person, per year, tax free, without triggering a requirement to file a gift tax return with the IRS.
Want to know what type of estate planning documents are best for your situation? Download a free copy of my easy estate planning guide. Obtain Your Free Will vs. Trust Estate Planning Guide here.
➮ Subscribe to Burton Law LLC’s channel to get notified when we post new videos. Subscribe here
I'm Attorney Thomas Burton. I'm an Estate Planning and Asset Protection Attorney here in Wisconsin and today, we're going to talk about how much you can give away, Tax Free, in the year 2022.
So many of my clients will come to me and ask, they've heard there's a limit on how much they can give away tax free per year and they're right about this. This limit is what the IRS calls the annual exclusion amount and for 2021, the annual exclusion amount was $15,000.
Now, good news, the IRS has recently announced that this amount is going up for the first time since 2018, to $16,000 in the year 2022.
The IRS adjust these numbers for inflation and unfortunately, as many of you maybe are aware, inflation has been hitting the country over the past 12 months.
The IRS is raising this annual exclusion amount for the first time since 2018. We've had this $15,000 amount, stuck there since 2018 which is quite a long time.
For 2022, you can give away $16,000, up to $16,000 tax free, per person per year, without requiring you to file a gift tax return with the IRS and again, this is what's called the annual exclusion amount.
Now, if you're married, you can each give away $16,000 per year per person. For example, let's say you want to give your daughter some money to buy a house and you're married, you the husband could write a check for $16,000 to the daughter and the wife could write a check for $16,000. So per married couple that would be a total of $32,000 you could give away per person per year and the great thing about the annual exclusion amount is it does not reduce your lifetime annual estate and gift tax exemption. That's the amount you can die with, before the federal estate tax is imposed on your estate and many people know the estate tax is quite significant and it is because it can rise to as much as 40% tax rate on the biggest estate but this only kicks in after, for 2021, the number was $11.7 million per person and for 2022, this number is rising to $12.06 million per person.
For a round number, in your head, you can think 12 million dollars, that's the amount you can have at death and leave tax free to your heirs and the good news is, Wisconsin does not have a separate estate tax, so there would be no state estate tax owed at your death. Only the federal to worry about. There's 16 states that have a state estate tax and they often start at lower amounts like our neighbors to the west, Minnesota has state estate tax but in Wisconsin, there's no state level estate tax.
Again, for 2022, you can give away $16,000 per person per year tax free, without filing a gift tax return and this is what's referred to as the annual exclusion amount.
The great thing about these annual exclusion gifts is if you make them each year, they don't count against your lifetime 12-million-dollar exemption amount. So, when I keep saying you don't have to file a gift tax return, let's say instead you want to give your daughter $100,000 this year to buy a house. You can still do that, you just have to file a gift tax return and tell the IRS, "I gave my daughter $100,000 this year in 2022. Then what the IRS will do is record that and they'll say currently you have 12 million you can leave at death, we're deducting $100,000 from that amount, so now at death you can only leave 11 million 900,000, let's say for 2022.
And I'm rounding to 12 million, it's 12.06 million dollars. It doesn't mean you can't make a gift larger than the annual exclusion amount but if you're looking for simplicity, a situation where you can just write a check with no reporting requirement to the IRS, that $16,000 or less amount is the limit for 2022.
And now wealthy individuals often use this amount every year in order to reduce their taxable estate because remember, they can gift the $16,000 and it doesn't reduce the $12.06 million, they can leave at death to their heirs.
It gets a bit complicated but that's what we've referred to as our unified gift in the state tax system. They unify it because they realize if you could give away all your money during life to avoid the state tax, many people would do that and time it perhaps just before death, give all their money to the kids, then there's nothing left in the estate to pay the estate tax. So as long as we have the estate tax, this is how they've unified it into a unified gift in a state tax limit.
So a reminder, at death the new amount in 2022 is $12.06 million or that would be up to $24.12 million for a married couple.
Now just a reminder, the $12 million in change estate tax exemption is set to be cut in half at the start of 2026. The 2017 tax cut and jobs act increased this limit, it doubled the estate tax exemption from 2018 through 2025. It was only for that period through 2025, it isn't permanent. It went from $5.49 million in 2017 to $11.17 million in 2018 indexed for inflation and this year, there were proposals to cut this limit as part of the Build Back Better plan, I should say in 2021, there's talk about that but in November, it was dropped from the text, so we'll see if Congress changes this at all but currently, we still have the higher limits until 2026, when it's set to sunset and then go back, excuse me, yes, 2026, 2025 would be the year, so 2026 would be the first year we would go back to the lower limits.
So just a reminder that it's 2022, the amount $16,000 is the annual exclusion amount, you can give to any person, per person per year and the amount you could die with without estate tax federal estate tax would be $12.06 million per year.
I hope this is some great news for you as you think about your giving and planning in 2022 and I always suggest you do this type of planning in concert with your overall estate plan. Set up to make sure that your assets get to the heirs you choose and minimize your taxes in the most efficient way possible.
Thanks for tuning in and we'll see you next time!
© 2022 Burton Law LLC. All Rights Reserved. Transcript and captions provided for ease of access for the hearing impaired. For questions about this topic, or to suggest a topic for a future blog post, please contact the office.