Attorney Thomas B. Burton answers the following question: "How much money can you give away per year tax free?" in the latest episode of Estate Planning 101. Join Attorney Burton as he discusses estate and gift taxes, and how the unified estate and gift tax system in the United States helps us understand why this question about how much you can give away per year tax free is relevant to your estate and gift tax planning.
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Transcript of Video: How Much Can You Give Away Per Year Tax Free?
Welcome back to Estate Planning 101. I'm Attorney Thomas Burton. I'm an estate planning and asset protection attorney here in Wisconsin and today's topic is "How much can you give away per year tax-free" or "Introduction to estate and gift tax."
So welcome to the classroom, sit down, take a seat and relax as we go through the wonderful world of estate and gift tax planning.
Often at my office, I will get this question from a client asking me how much can I give away this year to a child or a friend or a relative? Often a child and the question is something like how much can you give away per year, will the government let you or how much can I give away tax free?
The answer to this question leads us to a discussion of the estate and gift tax system in the united states. So today in estate planning 101, we're going to go over how this works.
Now often someone has heard somewhere there's a limit on how much you can give away per year tax-free and they are right in a sense, because this information is out there but they often don't know what to call that but in the IRS world, the amount you can give away tax for free per year is what they call the Annual Exclusion Amount. So I'm going to put that term up here. Every year the IRS sets this amount for the year and it goes up generally based on inflation. So the annual exclusion amount throughout the years has risen, that's why you may hear, 10 years ago you heard about someone doing this and now it's a little different. So I've got the numbers here and I'm just going to put down '2002 to 2005 the annual exclusion amount you could give giveaway' and what this means is, this is the amount, excuse me, you can give away without filing a gift tax return and we'll get to that in a moment but from 2002 to 2005, it was $11,000. From 2006 to 2008, so they don't do this uniformly, again it depends on inflation, it went up to $12,000. Then from 2009 to 2012, it was $13,000.
So are you noticing a pattern here? The IRS likes to go with a round number, which makes sense. 2013 to 2017, it was $14,000, the annual exclusion amount and finally we get to this year's amount which is 2018 to 2021, of $15,000.
So this year in 2021, you can give away $15,000 per person, per calendar year without filing a gift tax return and this is what we call the annual exclusion amount.
Now why this is important is there's an estate and gift tax lifetime exemption and the 2021 lifetime exemption this year, the IRS announced, they adjusted this for inflation, is equal to 11.58 million dollars per person. So what this means is if your estate, your total estate is worth less than this, when you die, you will owe no federal estate tax. Amounts over this are subject to the currently 40% federal estate tax rate. Current level is 40% but if you're under that level, you pay no federal estate tax. Now here in Wisconsin, we have no state level estate tax thankfully. So you would owe nothing in state estate tax or federal estate tax if you're under this amount. Some states have a state level estate tax like Minnesota, our neighbor to the west and that kicks in, I believe around 3 million dollars in 2021. They're generally tied to the federal limit and they do go up a little with inflation.
So when you see these numbers, if you recall maybe someone back in the 90s gave you or early 2000s, $10,000 a year tax free, that was likely the annual exclusion amount at that time. So this year, it's $15,000. At the end of 2021, the IRS will look at inflation and let us know if it's going to go up for 2022. You can see they kind of go in bands of three years, two, three, four and three, so it could stay the same or go up slightly.
Now what happens if you make, want to make a gift larger than this $15,000 exclusion? Well, it doesn't mean you will owe tax. It just means you have to file a gift tax return. So let's say, you want to give your cabin worth $300,000 to your only child and you want to do it during life, well, that's more than the annual exclusion amount. So you're going to need to file gift tax return and get the cabin value assessed, the fair market value. That amount then you file on the gift tax return and the IRS takes it over here and they deduct it from your 11.58 million when you die minus 300, well, I've got a point here, so it would be 0.30 and that leaves you with 11.28 million left to leave at death.
So that's the current level in 2021. Now this is set to sunset in 2025 it's set to go back to the 2018 level which was just above 5 million dollars, it was 585. So whether that happens it will depend on what the future president and congress do but just so you're aware, this is a historically high lifetime exemption amount.
Now, if you do want to gift an asset during life, you can do it. It's just that if it's over this annual exclusion amount, you need to fill out the gift tax return. There's other reasons I would advise under current law, you want to leave if it's an appreciated asset like a cabin, now if your heir plans never to sell it, this might not matter but if they do want to sell it later, leaving it at death is a good way to do it because it can result in a step up in basis or new basis at death for capital gains tax, because generally, if you give someone something during life, the donee of the gift, takes it at your basis. So we've got the donee and let's see, the donor the basis, that transfers is whatever you paid for it. So let's say you paid a hundred thousand for the cabin, that's the new basis they would get and if they were going to sell the cabin, they would get taxed on the difference. They sell it for 300, your basis is 100 from 1980 let's say, they would owe capital gains on the difference 200 which for many people, it's around 15% the long-term capital gains and so, for 200,000 that would be, excuse me, $30,000 right? Is my math right on that, 100 would be 15, yeah $30,000 capital gains.
So that's one other side of this, when you're thinking about what assets to leave at death. Currently we're allowed to get this new basis at death which is a reason to leave highly appreciated asset at death.
Now back to the annual exclusion amount, this can be a great way to reduce your taxable estate while you're alive if you want to do some lifetime gifting because you can give this amount each and every year and this amount does not reduce your lifetime exemption. That's why many wealthy families will give this amount every year because it doesn't reduce their 11.28 million like or excuse me 11.58 like this gift of the whole cabin would. So you can give gifts of cash or assets worth that $15,000 or less.
Now the last thing I want to cover today for this lesson is, I want to emphasize this $15,000 is per person, per year. So if you have a married couple, spouse a and b and they have one daughter, let's say, each spouse can give the daughter $15,000 per year. So between a married couple that can be $30,000 to the daughter and it's so the key is it's per person per year, if the daughter had one child, they could also give the grandchild the $15,000, because they're a separate person, that'd be another 15 and another 15.
Also it's per calendar year, so in 2020 let's say, you gave the daughter $15,000 in 2020, let's say you didn't want it, you're just single, well as soon as January 2021 arrives, you can also do another $15,000. So you can choose to do it every year, end of the year December and then do it again December but you don't have to wait the 12 months in between, you can make a gift in December and then write another check in January 2021. Now then you couldn't do another gift until 2022 but the point is, it's calendar year not 12 months. So if someone's really looking to do some lifetime gifting, if you're near the end of the year or the beginning of another one, that's another way to take advantage of this historically high lifetime exemption and these high annual exclusion amounts.
Finally I want to return to the sunset provision, the IRS under current law, this is going to sunset and go back to this level. So if you have a taxable estate in between here and here, maybe you aren't all the way above this but you're somewhere in here between 5.5 and 11.5. You could be making taxable, tax-free annual exclusion gifts every year for the next four to five years and you could have been doing it previously, you see and getting those amounts out of your taxable estate for estate tax purposes by gifting it to your heirs during lifetime because when you look at a 40% tax rate, on an amount over 11.58 million, that's a significant amount, if you think of each one million over that, the tax rate equals 40% is going to be 400,000 gone to the federal government. You can also do charitable gifting and other things to manage some of this but in general when someone asks me how much can I give away tax free, per year, generally I take that question in my mind, it brings me to the annual exclusion amount and so, if you try to google this or look it up with the IRS, that's the term they're going to use and these are the numbers you want to know and often like you say if someone had received a gift from someone, they'll be told one of these numbers was in their head and they want to know what the number is for this year.
So if you're watching this in 2021, it's $15,000, if you're watching it in a future year, you can always check the updated level like I say generally, they'll release it towards near the end of the year, heading into the upcoming year. Now a lot of times congress waits to make tax law changes till the end of the year, so sometimes there's uncertainty about this until we're actually into the new year but that's why this year it's a January, the new year I thought it was a good time to go over this unified estate and gift tax system in the United States.
So I hope this has been helpful to you, my estate planning 101 series is a long form educational series designed to educate and empower you to take charge of your own estate planning. If this video has been helpful to you, please consider giving it a like so that others can find and benefit from this information as well.
Thanks for watching and we'll see you next time.
© 2021 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.