Now that we’re firmly in 2022, there are a number of federal tax changes to consider before donating. In sum:
- Annual gift tax exclusion increases from $15,000 to $16,000
- Lifetime gift/estate tax exemption increased from $11.7 million to $12.06 million
- Lifetime Generation Skip Transfer Tax Exemption Increases from $11.7 Million to $12.06 Million
Annual exemption from gift tax
After four years, the annual federal gift tax exclusion increased from $15,000 to $16,000. The annual exclusion is the maximum you can give to or for the benefit of a single person in a calendar year without having to file a federal gift return (Form 709) and/or reduce your lifetime exemption ( see below). If you are married, you can “split” donations with your spouse, which essentially doubles your annual exclusion. For example, if you are married and your spouse consents, you can give up to $32,000 to an unlimited number of people in 2022 without gift or estate tax consequences. The IRS treats the $32,000 gift as two gifts below the annual exclusion, one from you and one from your spouse. In general, gifts intended to pay for certain educational and medical expenses are exempt, even if they exceed the annual exclusion, provided they are paid directly to the educational institution or medical provider and not to the recipient of education or medical treatment.
Lifetime exemption from gift/estate tax
There is a common misconception that you have to pay gift tax if you give more than the annual exclusion to a single recipient. Each taxpayer has a lifetime amount for donations and inheritance tax exemption. In 2022, the lifetime exemption increased from $11.7 million to $12.06 million. Unless tax laws change, the lifetime exemption will drop to approximately $6.2 million by the end of 2025. Donations above the annual exclusion described above count toward your lifetime exemption. and must be reported on a Form 709 tax return. Generally, you will only be liable for federal gift tax if your total lifetime gifts exceed the exemption. The only state that currently imposes its own gift tax is Connecticut.
Gift tax is related to inheritance tax. After you die, your executor (if you have a will) or estate administrator (if you don’t) will calculate the value of your estate and add it to the total taxable gifts you made while you were alive. . If the total amount (after deductions) is more than the lifetime exemption in the year of your death, your estate must pay inheritance tax on the amount in excess of the exemption. Rates range from 18% to 40%, depending on the size of your estate. Some states impose their own estate tax with different lifetime exemption amounts. Other states impose estate tax based on the value of transfers after death and your relationship to the recipient of those transfers.
Generation transfer tax
The lifetime exemption from a separate but related tax, known as the intergenerational transfer tax (GST), is also increased from $11.7 million to $12.06 million. The GST tax is quite complex. In a nutshell, lifetime gifts and transfers after death (for example, through your will or certain trusts) made to or for the benefit of people more than one generation distant from you (ignore people) are reported and accounted for. in your lifetime GST tax exemption. , which is separate from the lifetime exemption from gift and inheritance tax. For example, if you give $100,000 to your grandchild in 2022 during your lifetime or by will, $100,000 is deducted from your lifetime GST tax exemption (and $84,000 is deducted from your lifetime tax exemption on donations and inheritances). If the total of transfers to skip people exceeds your lifetime GST tax exemption, a 40% flat tax is imposed on the excess. Unlike the gift tax, there is no annual exclusion for the GST tax. Notably, gifts to be ignored by individuals are also reportable for gift and estate tax purposes, so it is possible to be liable for both gift/estate tax and GST.