Just as the federal government collects taxes on your income, it also collects taxes on large sums of money gifted to people, organizations and churches. However, more often than not, the average taxpayer won’t need to file a gift tax return due to the large annual gifting amounts allotted. As a result, many gifts aren’t subject to taxation.
What Is the Annual Exclusion Amount for Gift-Giving?
In 2021, the federal government allotted each individual — and their spouse separately — a lifetime exclusion amount of up to $11.58 million. The combined lifetime gifting exclusion amounts to a total of $23.16 million for one couple.
Do I Need to File a Federal Gift Tax Return?
Even if your gifting amount does not exceed $11.58 million, you may need to file a gift tax return. As of 2021, the annual federal gift tax exclusion enables you to gift up to $15,000 to as many people as you’d like without the amount affecting your $11.58 million or requiring you to file a federal return. This amount is subject to change year-to-year due to inflation. However, any amount you gift to an individual exceeding $15,000 will count toward your $11.58 million lifetime gift tax exemption.
For example, if you gift $20,000 to a family member, the additional $5,000 will count toward your $11.58 lifetime gift tax exemption. You will need to file a federal return because of the $15,000 annual gifting limit.
Likewise, if you paid another $20,000 to a different family member, $5,000 of that amount will count toward your lifetime gift tax amount. If you gifted both amounts in the same year, $10,000 of your combined gift amount would count toward your lifetime amount.
Estate Planning Using the Gift Tax
Gift taxes and estate taxes are connected. As of 2020, you have an $11.28 million federal estate exemption. You can leave up to $11.28 million in your estate before your beneficiary will owe any federal estate taxes.
If you’re married, your spouse is entitled to an $11.58 million estate exemption amount. This means your spouse will only owe federal estate taxes on inheritances exceeding $11.58 million.
To sum up, each individual receives a federal, lifetime exemption amount of $11.58 million. Gift amounts exceeding $15,000 per person annually will require you to file a federal gift tax return. As a result, annual gift giving of less than $15,000 per year becomes a great approach to estate planning. This trickled gift-giving approach ensures you aren’t cutting into your beneficiary’s estate exemption amount, reducing your beneficiary’s taxable estate.
Get Professional Tax Advice From the Certified Public Accountants and Advisors at Marshall Jones
Collectively, our certified public accountants and advisors at Marshall Jones have more than 35 years of experience in professional accounting, bookkeeping and tax planning and preparation. Our attentive accountants and advisors can provide expert advice while answering any questions you might have.