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The Lifetime Exemption For Federal Inheritance And Gift Tax

The lifetime exemption for federal gift taxes is a dollar amount you can give away without paying any tax.  It's the giver, not the recipient, who must pay it. The Internal Revenue Code also provides for an annual exclusion, and some gifts are exempt from taxation, so they don't count against either the exemption or the exclusion.

The Tax Cuts and Jobs Act (TCJA) went into effect in January 2018 and it made a significant change to the estate and gift tax exemption, virtually doubling it to 11. 2 million.  The two taxes share the same exemption amount, and it's adjusted periodically to keep pace with the inflation. But it is important to note that this doubling of the exemption is temporary and is set to expire in 2025.  

How the Annual Gift Tax Exclusion Works
The annual exclusion was $15,000 for 2018, and it unchanged for 2019. You can give this much money or property to as many individuals as you like each year without incurring a gift tax. If you want to give gifts to two people, they can total $30,000. You can give $45,000 to three people...and so on. If you give your child $20,000 in one calendar year for a down payment on a house. You can either pay the gift tax on the additional $5,000 over the annual exclusion in the current year, or a better choice is to apply the $5,000 to your lifetime exemption.

Lifetime Exemption
The increased lifetime exemption was $11.18 million in 2018 and increased to $11.4 million for 2019. It is inflation adjusted and will likely increase for 2020.

The Unified Tax Credit
The federal gift tax and estate tax are tied together by the Unified Tax Credit. You can use the credit to shelter your estate from taxation when you die, or you can use it to defray the tax burden of giving more than the annual gift tax exclusion to any individual in a given year.

Other Tax-Free Gifts
Uncle Sam does encourage generosity as he doesn't want you to deplete your estate during your lifetime to avoid owing an estate tax when you die. You can give as much as you like to charities that are approved by the IRS without incurring a gift tax. And you can do this today, while still receiving an income stream from those assets during your lifetime and for the lifetime of another through specialized trusts such as a Charitable Remainder Unit Trust.

And If You're Married...
Marriage effectively doubles your annual exclusion, as you each receive the 11.4 million (in 2019) exclusion. You can also give to your spouse until your heart's content without incurring a gift tax, provided he or she is a U.S. citizen. Should one spouse die ensure that your accountant files the necessary tax forms so that the deceased spouse’s exclusion transfers to the surviving spouse. The surviving spouse can then have an estate of up to 22.8 million (for 2019) before incurring any federal estate tax.

The Bottom Line

The lifetime gift tax exemption lets most Americans give away considerable assets tax-free, either during their lifetime as gifts or at their passing through bequests. If you expect that your estate will be more sizable, please call our office and let’s conduct a review.  This can be especially important, because as mentioned above, TCJA is set to expire at the end of 2025. The exemption will then go back to the pre-2018 levels of $5 million, inflation adjusted, in 2026. Most tax and legal authorities do not expect Congress to keep the TCJA's estate and gift tax provisions in place after 2025.  It is important to note that the IRS has provided guidance that any gifts given under the TCJA will qualify for the exemption, even if the amounts go down in 2025.  In other words, if you gift away 11 million in assets in 2019, live until 2027 or beyond, and the TCJA has expired; your estate will not be taxed for the gifts over the then lower exemption amount. Such gifts were done when the TCJA was in effect and thus cannot be taxed at a later date, even though the current exemption amount is lower.