It is a common misconception that when a person makes a gift to another recipient that there is a gift tax. Gift tax planning is complicated yet can be an essential tool in estate planning.
Annual Exclusion
In 2022, the annual gift tax exclusion is $16,000 per individual. This means that you can give your children, your niece, your grandchildren, or any other recipient $16,000 each and not be taxed on it or be required to file a gift tax return. Furthermore, married couples can gift up to $32,000 per recipient per year without tax penalties. For example, a married couple decides to gift $30,000 to each of their three children in 2022. Under this example, no gift tax return needs to be filed and there are no tax consequences because each parent only gifted $15,000 to each child.
Moreover, you are always free to make a gift that exceeds the annual gift tax exclusion. However, doing so will eat away at your lifetime gift and estate exemption. Currently, the lifetime gift and estate tax exemption is $12.06 million. The lifetime gift and estate tax exemption is set to sunset in 2026 and this $12.06 million number may be reduced to approximately $6 million in 2026. If you do make a gift that exceeds the annual gift tax exclusion amount then you will need to file a gift tax return. For example, an individual decides to give $1,000,000 to their only child. In this example, a gift tax return will need to be filed and their lifetime gift and estate tax exemption will now be reduced to $11.06 million. There is still no actual gift tax due, only the exemption is decreased.
New York State does not have a gift tax, however, there is a three-year clawback rule. This means when a person passes away, New York State will clawback the last three years of gifts and include the value of those gifts in the person’s estate. For example, if an individual gifts $10 million dollars away one year before the individual’s death, the $10 million that the individual tried to get out of his estate would be clawed back into the estate and would be included in the total value of the person’s estate for estate tax purposes.
Gifting can be beneficial for a lot of families, we at Littman Krooks, LLP, have over 30 years of experience working with individuals and families to plan for their future. Our knowledgeable team of estate planning lawyers commands an impressive knowledge of state and federal tax laws and how they impact our clients’ choices.
We can review your situation and help you ensure that your gifting decisions do not expose your estate—or loved ones—to unnecessary taxation.
