Filing estate tax return and electing portability when first spouse dies could eliminate future estate tax if the gift and estate tax exemption drops.
2022 Gift and Estate Tax Exemption
2022 gift and estate tax exemption and annual gift exclusion. How much can you gift without a gift tax?
After all the noise in 2021 about how the new Congress and President Biden were going to lower the gift and estate tax exemption, it didn't happen.
President Trump's gift and estate tax exemption remains the law.
The 2022 Gift and Estate Tax exemption is $12,060,000 per person, up from $11,700,000 in 2021. And the tax rate on estates over the exemption amount remains at 40%.
The 2022 annual gift exclusion is $16,000, up from $15,000 in 2021.
In 2010, President Obama raised the gift and estate tax exemption to $5,000,000, indexed for inflation.
In 2017, President Trump doubled the gift and estate tax exemption to $10,000,000, also indexed for inflation, but Trump's exemption is scheduled to sunset at the end of 2025, unless Congress and the President make it permanent.
If Trump's exemption sunsets at the end of 2025, the gift and estate tax exemption will default to Obama's exemption, which is estimated to be around $7,000,000 ($5,000,000 indexed for inflation since 2011).
Historical Gift and Estate Exemption
The current estate and gift tax situation is very positive compared to years past.
Below is a table showing the historical estate tax exemption, estate tax rate and annual exclusion since 1997.
Notice that in 1997 the estate tax exemption was only $600,000 and the estate tax rate was 55%, which meant that if you had an estate worth more than $1,000,000 your estate tax would be $1,000,000 - $600,000 = $400,000 (55%) = $220,000. Yikes!
|Year||Gift and Estate Tax Exemption||Estate Tax Rate||Annual Gift Exclusion|
|1997 - 2001||$600,000 - $675,000||55%||$10,000|
|2002 - 2005||$1,000,000 - $1,500,000||50% - 47%||$11,000|
|2006 - 2008||$2,000,000||46% - 45%||$12,000|
|2010||no estate tax 😎||no estate tax 😎||$13,000|
|2011 - 2017||$5,000,000 - $5,490,000||35% - 40%||$13,000 - $14,000|
Gifting - How Much Can You Gift?
Many people think they can only gift $15,000 per year per person. They are referring to the annual estate tax exclusion (which for 2022 is now $16,000).
The annual estate tax exclusion is what we call the freebie gift amount. You can gift $16,000 per year to as many people as you want, literally anyone, it doesn’t even have to be family, with no impact on your gift and estate tax status.
But you can actually gift way more that without incurring a gift tax.
The 2022 gift and estate tax exemption is $12,060,000. The exemption is a combination of lifetime gifts and estate value.
When you make gifts, you can use your $16,000 per person annual gift exclusion. But if you want to gift more, you can tap into your $12,060,000 gift and estate tax exemption.
Let’s say you want to gift $1,016,000 to your daughter in 2022. $16,000,000 would be covered by the annual gift exclusion, the freebie. The remaining $1,000,000 would be covered by your lifetime gift and estate tax exemption. If you died in 2022, your remaining estate tax exemption would be $11,060,000 ($12,060,000 - $1,000,000). As long as your estate value is less than $11,060,000, there would be no estate tax - even though you made a big gift to your daughter.
You ability to gift without a tax is great. You have the annual estate tax exemption of $16,000 per person plus you can tap into the $12,060,000 estate and gift tax exemption.
FYI. This discussion is about the federal gift and estate tax. Some states have a separate "state" estate tax. California does not have a state estate tax. California has very high taxes while you are alive, but it has no estate tax when you die. We have that going for us!
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