The Internal Revenue Service has announced that the annual gift tax exclusion is increasing next year due to inflation. After four years of being at $15,000, the exclusion will be $16,000 per recipient for 2022—the highest exclusion amount ever. Further, the annual amount that one may give to a spouse who is not a US citizen will increase to $164,000 in 2022.
In addition, the estate and gift tax exemption will be $12.06 million per individual for 2022 gifts and deaths, up from $11.7 million in 2021. This increase means that a married couple can shield a total of $24.12 million without having to pay any federal estate or gift tax. For a couple who has already maxed out lifetime gifts, this means that they may now give away another $720,000 in 2022.
Each year, the IRS sets the annual gift tax exclusion, which allows a taxpayer to give a certain amount (in 2022, $16,000) per recipient tax-free without using up any of his or her lifetime gift and estate tax exemption (in 2022, $12.06 million). For married couples, this means that they can give $32,000/year per recipient beginning next year. As an example, if a married couple has three children and five grandchildren, they may transfer $256,000 in 2022 to their descendants without touching their combined $24.12 million gift tax exemption, thus allowing them to transfer further substantial assets gift-tax-free. Not only are the assets removed from the taxpayers’ taxable estates, the assets’ future appreciation also avoids gift and estate taxes.
Generally, spouses who are both US citizens may transfer unlimited amounts to each other without incurring any gift tax, as any assets in excess of the couple’s combined estate tax exemption ($24.12 million in 2022) will be taxed at the death of the surviving spouse and transferring assets to the survivor only defers the tax that the IRS will eventually collect.
Gifts to a non-US citizen spouse, however, are limited. Since a non-US citizen spouse may not be subject to the US estate tax, one cannot transfer unlimited assets to a non-US citizen spouse since that transferred wealth could potentially avoid US estate taxation upon the non-US citizen spouse’s death. Thus, when the recipient spouse is not a US citizen, and regardless of whether the non-US citizen spouse is a resident or nonresident of the United States, the amount of tax-free gifts is limited to an annual exclusion amount. For calendar year 2022, the first $164,000 of gifts to a spouse who is a non-US citizen are not included in the total amount of taxable gifts.
If one gifts an amount that is above the annual gift tax exclusion, he or she will use a portion of his or her lifetime gift tax exemption ($12.06 million in 2022). The gift and estate tax exemption are linked, meaning that the use of one’s gift tax exemption will reduce the amount one may leave at death estate-tax-free. If one makes gifts in excess of the annual gift tax exclusion, one must file a gift tax return, due April 15 in the following year, to report the gift and track the amount of the lifetime exemption that has been used.
Note: Although the IRS has announced that the lifetime estate and gift tax exemption will increase to $12.06 million in 2022, that amount is set to be cut in half at the start of 2026. An earlier version of the Build Back Better Act included a provision that would have cut the exemption in half at the start of 2023 instead, but that was dropped from the November 3 legislative text. It is unclear whether that provision will work its way back into any final legislation. Thus, if one is interested in using his or her higher lifetime gift tax exemption, he or she may want to act fast before any changes to the law are implemented.
If you have questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Laura B. Lerner
Daniel R. Cooper
Ellen J. Deringer
Christina Mesires Fournaris
Francis J. Mirabello