March 21, 2022
By John A. Meier, II
The Internal Revenue Service has approved new gift and estate tax exclusion amounts for 2022. After four years of having the annual gift tax exclusion amount of $15,000, for 2022 the amount is $16,000. This means that individuals in 2022 can now give others up to $16,000 free of gift taxes. Gift-splitting allows a married couple (or one of them) to gift twice as much as an individual without being subject to a gift tax. For the 2022 tax year, the annual gift exclusion is $32,000 for a couple or for a married individual using gift-splitting. As an example, in 2021, a married couple with two children and three grandchildren could have made gifts totaling $75,000 with no gift tax consequences. In 2022, this same family can make gifts totaling $80,000 with no gift tax consequences.
There are some exceptions to the $16,000 limitations on the amount of annual gifts. Some of these are:
For example, you might pay the tuition of a grandchild’s upcoming school year directly to the school or college. Even if that amount is more than $16,000, this payment on behalf of the grandchild does not count against the annual gift tax exclusion amount for any other gifts made to the same grandchild.
There are other changes in laws and gift tax regulations. Generally, spouses who are both US citizens may transfer unlimited amounts to each other without incurring any gift taxes. This has not changed in 2022. However, the rules are different where one of the spouses is a non-US citizen. For married couples where one spouse is not a US citizen, the annual amount that can pass gift tax free in 2022 to the non-US citizen spouse is $164,000. The reasoning behind the difference between US spouses and non-US citizen spouses involves possible avoidance of estate taxation by non-US spouses. Gifts between US spouses stay within the US and are possibly subject to estate taxes after the death of both US spouses. Gifts to non-US spouses can be made even if the non-US spouse does not reside in the United States, possibly removing that amount from future estate tax.
Changes have also been made in an individual’s gross estate and gift tax exemption amounts. For gifts and other transfers during life and after death, the amount that is exempt from estate and gift tax that is in excess of the annual exclusion has increased in 2022 to $12.06 million per individual. This is up from $11.7 million in 2021. This increase means that, with proper planning, a married couple can shield a total of $24.12 million without having to pay any federal estate or gift tax in 2022. For a couple who has previously maxed out lifetime gifts, this means that they may now give away another $720,000 in 2022 without gift tax consequences, provided proper gift estate and generation-skipping transfer tax returns are filed.
The estate and gift tax exemption amount will be annually adjusted by the Internal Revenue Service based on inflation. Under the current laws, the annual adjustments will not continue indefinitely. The estate and gift tax exemptions are currently scheduled to be reduced to $5 million, adjusted for inflation on January 1, 2026. This is estimated to be approximately $6,000,000 which is less than one half of the current exemption amount. Many see this as a planning opportunity for individuals with larger estates. However, concerns have been expressed about making excluded gifts before 2026 and having to pay gift taxes on the amount in excess of the reduced 2026 exclusion amount. This is often referred to as a “clawback” type of concern. This is an example of a clawback concern: Assume an individual makes a gift of $10 million in 2022 and that same individual dies after 2025 when the exclusion amount has reverted to $5 million adjusted for inflation. Will that individual’s estate get the benefit of the estate tax exclusion of $10 million, or will the amount in excess of the 2026 be clawed back into the individual’s estate for estate and gift tax purposes? According to information published by the IRS, “Individuals taking advantage of the increased gift tax exclusion amount in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.” This does not mean that Congress cannot act before 2026 to change the laws regarding estate taxes and exemptions. However, for many individuals and couples with larger estates, the current laws and positions expressed by the IRS present significant planning opportunities for their family and future generations.
John Meier has been assisting clients with their estate planning, long term care planning, elder law, trust administration, and probate needs since June of 1985. John heads up FCW’s Estate Planning and Probate divisions and continues to focus his efforts assisting individuals and families with their estate planning, long term care, elder law, probate, and trust administration needs. John has been named to Georgia’s Legal Elite and Atlanta Magazine’s Top Wealth Managers, and currently serves as the City Attorney for Waleska, Georgia. He is also a Certified Trust and Financial Advisor, a nationally recognized certification, distinguishing him among his peers.