Under the Tax Cuts and Jobs Act enacted last year, the federal lifetime gift and estate tax exemption doubled. Every year the lifetime gift tax exemption and estate tax exemption amounts are adjusted for inflation. For 2019, the exemption increased to $11.4 million for individuals and $22.8 million for married couples. That means, for example, that estates valued at less than $11.4 million will not be taxed. Similarly, an individual could make gifts totaling $11.4 million during their lifetime without tax exposure.
In addition, each year, an individual can make gifts of up to $15,000 in value to as many people as they want without reporting the gifts to the IRS. Married couples may make gifts up to $30,000. Only gifts exceeding that annual value must be reported on tax forms.
Generally, the goal in estate planning is to reduce the value of an estate so that it falls under the exemption, ensuring that no estate taxes are owed after death. Currently, estates valued at more than the exemption amount are taxed at the rate of 40 percent.
Traditionally, one way to reduce estate value is by taking advantage of the annual exclusion. According to the IRS, a taxable gift includes anything of value that is given or transferred to another without receiving something of value in return. Under this definition, cash, financial accounts, stocks and bonds, real property, business interests, personal property, debt forgiveness, and no or low-interest loans may qualify as gifts.
However, the following gifts, no matter their value, are exempt from federal gift taxes:
- Tuition. Tuition payments for another may be made directly to an educational institution without gift tax consequences. There is no limit on the amount that can be funded, or on the number of years tuition can be paid.
- Spousal gifts. If your spouse is a U.S. citizen, there is no limit on the value of gifts that may be made to him or her. However, if your spouse is not a U.S. citizen, tax free gifts are limited to $155,000.
- Medical expenses. When medical expenses are paid directly to the person or organization providing care, no tax liability is incurred for either party. Typically, qualifying expenses include diagnosis, treatment, medical procedures, transportation related to care, and medical insurance.
- Charitable donations. Gifts made to qualified charitable organizations do no incur gift tax liability.
The increase in the federal gift and estate tax exemption may actually have little impact on the average estate. According to a study by United Income, retired adults who die in their 60s on average leave behind estates valued at $296,000. That amount increases to $313,000 for adults in their 70s and $315,000 for adults in their 80s. Adults who die in their 90s left behind estates valued at $283,000.
However, the timing and method of a gift transfer may have other tax implications, ones that can significantly impact the value of a gift. For that reason, when creating a gifting program, it is important to consult with an estate planning attorney.