By Howard Kaslow
Each year the Internal Revenue Service (IRS) adjusts for inflation the federal estate and gift tax exclusion amount (often referred to as an “exemption” amount).
The exclusion amount for a decedent dying in 2022 and for cumulative taxable gifts made by an individual through 2022 is $12,060,000 (an increase from $11,700,000 in 2021).
The IRS also periodically adjusts for inflation the federal gift tax annual exclusion amount. For federal gift tax purposes, an individual is entitled to make annual exclusion gifts in 2022 up to a maximum of $16,000 per donee (an increase from $15,000 in 2021) if certain technical requirements are satisfied. The number of separate donees is unlimited. Annual exclusion gifts are not taxable gifts and do not count against the cumulative gift tax exclusion.
Both taxable and annual exclusion gifts made by an individual donor to someone other than the donor’s spouse can be considered as having been made one-half by the individual donor and one-half by the donor’s spouse if they make the appropriate gift-splitting election on federal gift tax returns. For example, a 2022 gift of $32,000 to a child by one spouse can be considered to be a gift of $16,000 from each of the spouses and thus use each spouse’s annual exclusion for such gift, resulting in no taxable gift. It does not matter which spouse is the source of the gift in such case. If gift-splitting is elected by spouses, it must apply to all gifts made by either spouse during the calendar year.
Two important exceptions exist with respect to such $16,000 limitation on annual exclusion gifts: (i) payments made directly to a provider of medical care (including premiums paid directly to a provider of health insurance) and (ii) payments made as tuition directly to certain educational organizations. The latter can be made on behalf of a donee in any amount in addition to an annual gift of $16,000. Payment of expenses for medical care and tuition for someone other than a dependent thus can be gift-tax free and, in the case of medical expenses, also may provide an income tax deduction for the donee.
Under current law, the inflation adjusted federal estate and gift tax exclusion amount will be reduced by 50% in 2026. For example, if the exclusion amount for 2026 would have been inflation adjusted to $13,000,000 (without such reduction), then the actual 2026 exclusion amount will be reduced to $6,500,000. Of course, the current law is subject to any changes Congress may make prior to 2026.
Federal tax laws are highly technical, and care must be taken to comply with the applicable tax law requirements. The forgoing information is necessarily general and is not intended as tax advice for any specific gifts proposed to be made by an individual. Please contact one of our estate planning attorneys for assistance in planning and structuring your gifts.