The Federal Gift Tax – What You Need to Know

The following is important information regarding the federal gift tax and what you need to know about it.

The gift tax is a tax on assets that are given away during the donor’s lifetime.
In contrast, the estate tax is a tax on assets that are transferred to heirs after the owner’s death.

You can give any number of people up to $15,000 each per year without your gift being taxable, thanks to the annual gift tax exclusion ($15,000 in 2021). Married couples can combine their exclusions and give any number of people up to $30,000 each per year.

You can give your spouse an unlimited amount without any gift tax, as long as your spouse is a U.S. citizen. If your spouse is not a U.S. citizen, you can give up to $159,000 per year to your spouse without your gifts being taxable. ($159,000 is the exclusion amount for 2021).

Most people will never have to pay any gift tax – or federal estate tax either. That’s because, in addition to the annual gift tax exclusion, you also have a lifetime exclusion for federal gift and estate taxes. It is set at $11.7 million for 2021. This means that you can currently give away up to $11.7 million during or after your lifetime without having to pay any federal gift or estate tax on it. Married couples can use both of their exclusions to jointly shelter up to $23.4 million from those taxes.

The lifetime exclusion is scheduled to decrease to $5 million, adjusted for inflation, after 2025 unless Congress changes the law in the interim. And there is a chance that Congress may reduce the lifetime exclusion sooner than is currently planned. Wealthy individuals may want to use their exclusions to make tax-free gifts to their heirs now in case the exclusion amount decreases in the future. Please consult with us for estate planning advice.

Making large gifts now will not harm estates after 2025, so says the IRS to wealthy individuals who want to take advantage of the high lifetime exclusion now to reduce the size of their taxable estates before the exclusion potentially decreases.
If you give someone other than your spouse more than $15,000 in 2021, you will probably have to file a gift tax return, even if you do not owe any gift tax.

Some gifts are not subject to gift tax and do not need to be reported on a gift tax return. Those gifts generally include:

  • Gifts to charities.
  • Gifts to political organizations for its use.
  • Tuition payments that you make directly to a qualifying educational organization. This exclusion only applies to tuition, not to room and board, books, supplies, or other educational expenses, although you may apply the $15,000 annual exclusion to those expenses.
  • Medical expenses that you pay directly to a care provider for an individual’s medical care. In addition to medical care, this exclusion applies to medical insurance that you pay for someone else, provided those payments are made directly to the insurance provider.

If you want to know more about the federal gift tax, please speak with us. With offices in Rutland and Williston, Vermont Copper Leaf Financial develops a customized wealth management plan designed to integrate every aspect of your financial life. Our approach is to provide clarity and calm amidst the chaos. Where there is uncertainty, we look for facts. We call our approach evidence-based investing. Call us today at 802-878-2731 to schedule a strategy session and begin building your road map to financial success.

Article published in July 2021 edition of Eye on Money. If you would like to be added to our mail list please email [email protected].