Economic TrendSpotter: HOW CHANGES TO THE GIFT TAX EXCLUSION MAY IMPACT YOU by Tony Jao
HOW CHANGES TO THE GIFT TAX EXCLUSION MAY IMPACT YOU
$15,000 Annual Exclusion
The federal government gives each of us an allowance to gift anybody $15,000 per year without incurring any gift tax. This $15,000/year replenishes every year, and it’s $15,000 per person. So, theoretically, I could gift every person that I know $15,000 today, and then another $15,000 next year and the year after, and there would be NO gift tax. The annual gift tax exclusion limit is $15,000 in 2021 (no change from 2020).
$11,700,000 Lifetime Exclusion
What most people don’t realize, is that there’s a second allowance of $11.7mm! In other words, let’s say that I want to give you $115,000. That’s $100,000 more than what I can give you out of my $15,000 annual bucket. That’s not a problem at all because I also have the $11,700,000 bucket. The $11.7mm bucket is called my “Lifetime Exclusion.” If I use any of it during my lifetime, I simply reduce my estate tax exclusion by that amount.
So, in our example, if I gift you $115,000, I would take $15,000 out of my annual bucket and $100,000 out of my lifetime bucket. My annual bucket replenishes each year. But my lifetime bucket does NOT replenish. In fact, I must reduce my lifetime bucket by $100,000, so now my lifetime exclusion is “only” $11.6mm instead of $11.7mm. The lifetime exclusion went up from $11.58mm in 2020 to $11.7mm in 2021. For more details, see my article called, “The Gift Tax Myth: How to Navigate Around It.”
Be sure to check with a CPA for more details about how these changes may impact your specific situation.
PLEASE NOTE: THIS LETTER AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 559. ALSO, THIS ARTICLE REFERENCES THE FEDERAL GIFT TAX. YOUR STATE GIFT TAX LAWS MAY BE DIFFERENT.
The federal government gives each of us an allowance to gift anybody $15,000 per year without incurring any gift tax. This $15,000/year replenishes every year, and it’s $15,000 per person. So, theoretically, I could gift every person that I know $15,000 today, and then another $15,000 next year and the year after, and there would be NO gift tax. The annual gift tax exclusion limit is $15,000 in 2021 (no change from 2020).
$11,700,000 Lifetime Exclusion
What most people don’t realize, is that there’s a second allowance of $11.7mm! In other words, let’s say that I want to give you $115,000. That’s $100,000 more than what I can give you out of my $15,000 annual bucket. That’s not a problem at all because I also have the $11,700,000 bucket. The $11.7mm bucket is called my “Lifetime Exclusion.” If I use any of it during my lifetime, I simply reduce my estate tax exclusion by that amount.
So, in our example, if I gift you $115,000, I would take $15,000 out of my annual bucket and $100,000 out of my lifetime bucket. My annual bucket replenishes each year. But my lifetime bucket does NOT replenish. In fact, I must reduce my lifetime bucket by $100,000, so now my lifetime exclusion is “only” $11.6mm instead of $11.7mm. The lifetime exclusion went up from $11.58mm in 2020 to $11.7mm in 2021. For more details, see my article called, “The Gift Tax Myth: How to Navigate Around It.”
Be sure to check with a CPA for more details about how these changes may impact your specific situation.
PLEASE NOTE: THIS LETTER AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 559. ALSO, THIS ARTICLE REFERENCES THE FEDERAL GIFT TAX. YOUR STATE GIFT TAX LAWS MAY BE DIFFERENT.
Source: CMPS Institute
FROM THE DESK OF
TONY JAO
NMLS: 7536
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