For the first time in four years, the IRS is raising the gift tax limit for 2022. Next year, the annual gift tax exclusion will be $16,000—up from the $15,000 limit it has been since 2018.
The new estate and gift tax exemption provisions were part of over 60 tax provisions adjusted due to inflation that the IRS announced on Nov. 10.
Lifetime estate and gift tax exemption will also be higher
The new gift tax exclusion amount is the highest it has ever been. The IRS is also increasing the lifetime estate and gift tax exemption to $12.06 million per individual for 2022 gifts and deaths. That’s up about $360,000 from the 2021 lifetime exemption limit of $11.7 million.
For married couples, that means up to $24.12 million in a lifetime estate and gift tax exemption can be shielded without paying federal estate or gift tax.
What is the gift tax exclusion?
The gift tax exclusion allows taxpayers to give their heirs a certain amount of money without being taxed. The limit of how much a taxpayer can gift to a recipient without paying taxes is set annually by the IRS.
For example, a grandmother with five grandchildren can give each grandchild $16,000 in 2021 without paying taxes on that gifted amount. The annual gift tax exclusion also doesn’t count toward a taxpayer’s lifetime gift and estate tax exemption, which is $12.06 million for 2022.
Married taxpayers can gift twice as much without taxes.
Married couples can give twice the limit amounts without having to pay taxes. So, in the example above, a grandmother and grandfather can give each of their five grandchildren $32,000 each (a total of $160,000) without having to pay federal taxes on those gifts and without those gifts touching their combined $24.12 million lifetime gift tax exemption.
Don’t wait until you die to gift assets to your family.
Estate planners often recommend that taxpayers give tax-free gifts of assets to their heirs before they die. Doing so helps reduce the value of their estate, which could be subject to federal estate taxes in the future.
“We always prefer clients make lifetime gifts rather than waiting to die and use the exemption at death because when you’re making a lifetime gift you’re really leveraging that exemption amount,” Toni Ann Kruse, an estate lawyer with McDermott Will & Emery, told Forbes.
The estate tax exemption will be cut in half in 2025.
The lifetime estate tax exemption of $12.06 million won’t last forever. That amount is supposed to be cut in half in 2025. In 2017, the Tax and Jobs Act doubled the exemption through 2025. That provision bumped the exemption up from $5.49 million in 2017 to $11.17 million in 2018, where it remained until the recent increase.
This year, legislators included a provision to cut the exemption in half in an early version of the Build Back Better Act, but it was eventually dropped, Forbes reports.