A limit known as the yearly exclusion can be given to a recipient each year. This yearly exception for gifts might be given in the form of cash or property. It has been confirmed that the yearly exclusion will stay at $15k in 2021 by the Internal Revenue Service (IRS).

Annual Exclusions and How They Work

The yearly cap excludes taxpayers one time only per individual per year. If grandparents give their grandkids several thousand dollars, the money will be included in each grandchild's yearly exclusion. On January 1st, each year begins anew.

In 2021, the exclusion was set at $15,000, so if you give your grandchild four different presents of $4,000, the total amount you give would be $16,000, which is $1,000 more than you are allowed to donate in a single year.

Dates for Reporting Gifts Eligible for the Annual Exclusion

Let's pretend that you and your spouse, both American citizens, make the following donations in 2022:

1. you give $5,000 to your son Bob in March, and then in December, you give him another $5,000.
2. In March, your spouse provides $10,000 to her daughter Betty, and in December, she gives another $10,000.
3. You gift your niece, Susie, $2,000. In June.
4. In December, you present your wife with a diamond ring that costs you $50,000.
5. In December, your better half presents you with a rare wine bottle worth $50,000.

Giving That Doesn't Have To Be Reported

You've given away $62,000 in 2022, but it's all tax-free thanks to yearly exclusion gifts and the unlimited marital deduction. You may give up to $10,000 to Bob tax-free every year, up to $2,000 to Susie, and up to $50,000 to your spouse if you take advantage of the unlimited marital deduction. All of your annual gifts of $50,000 or less are tax deductible.

Exempt From Reporting Gifts

However, your spouse has given gifts that may or may not count against the yearly exclusion of $70,000 in 2022: Betty receives $20,000, which is more than the $16,000 yearly exclusion, and you receive $50,000, which is eligible for the unlimited marital deduction.

What happened to Betty's $20,000? Is $4,000 of the $20,000 I gave her subject to gift tax? This will be determined by two factors: (1) how the source account or accounts were named and (2) whether or not you and your spouse agreed to divide the presents equally.

Things To Keep In Mind

The yearly exclusion is crucial when it comes to asset management and avoiding estate taxes.

Deduction for Inheritance Taxes

The yearly exclusion of $15,000 allows you to gift that much to an unlimited number of recipients. That adds to $135,000 yearly or $15,000 for your five grandkids. Your combined estate and gift tax exclusion include any gifts to an individual over $15,000.

This is the maximum value of your estate or gifts you may make without incurring gift or estate taxes. Exemption from the gift tax for a lifetime is $11.7 million in 2021 and will rise to $12.06 million in the following year. That means a married couple may give away $24.12 million in 2022 without any gift tax liability.

Financial Planning

The annual exclusion and the estate tax exemption are commonly addressed as part of a comprehensive estate plan or asset management strategy. A high net worth individual (HNWI) may seek advice from a wealth management business or an independent financial advisor to help them decide how to effectively distribute their money through gifts and wills to minimize their tax liability.

A will is a legal document that specifies the distribution of an individual's assets and, if applicable, child custody arrangements in the event of death. A will is a legal document in which an individual declares their final desires and appoints a trustee or executor to carry them out.

What's The Exclusion Gift Amount?

There will be a $15,000 yearly gift exclusion in 2021. That sum will rise to $16,000 in 2022. This rule applies to all per-person donation amounts. In 2021, a donor can avoid paying gift taxes on gifts worth up to $11.7 million. The rise in 2022 will bring the total to $12.06 million.

What Will Happen To The Estate Tax Exemption in 2025?

The $5 million estate tax exemption increased by the Tax Cuts and Jobs Act will return to its pre-Act level in 2025 after adjusting for inflation. As a result, individuals can pass on to their heirs a lesser sum before being subject to the estate tax.