The start of a new year means new adventures, exciting opportunities, and planning for the year ahead. For some, it’s the start of a new job, the promise of a new business venture, or a move to a new city. For others, it may be focusing on their finances, working towards new health and wellness goals, or finally tackling those tasks that didn’t get done last year.
In the world of estate planning, this means staying up to date on the latest estate and gift tax exemption announcements from the IRS, who recently announced the changes for 2022 to the lifetime estate and gift tax exemption, the annual gift tax exclusion, and the amount you may gift to a non-US citizen spouse.
Lifetime Estate and Gift Tax Exemption
With the New Year brings an increase in the estate and gift tax exemption. The new exemption will be $12.06 million per individual for 2022 gifts and deaths, up $360,000 from $11.7 million in 2021.
What exactly does this mean?
This increase means that starting this week, an individual can shiel $12.06 million and a married couple can shield a total of $24.12 million during their lifetimes without having to pay any federal estate or gift tax. For a couple who had previously maxed out lifetime gifts, they may now give another $720,000 in 2022.
Annual Gift Tax Exclusion
This year the annual gift tax exclusion will be increasing by $1,000 per recipient due to inflation. The gift tax exclusion, which has held steady at $15,000 per recipient for the last four years, will now be $16,000 per recipient – the highest exclusion amount to date.
What does the annual gift tax exclusion do?
It allows a taxpayer to give the excluded amount per recipient tax-free without using up any of his or her lifetime gift and estate tax exemption.
Can you give me an example?
Absolutely! For a married couple, each spouse can gift $16,000 per recipient per year, for a total of $32,000/year per recipient as of January 1, 2022. So if you and your spouse have two children and four grandchildren, you may transfer a total of $192,000 in 2022 to your descendants without touching your combined $24.12 million gift tax exemption.
Gifts to a Non-US Citizen Spouse
It is important to note that gifts to a non-US citizen spouse are limited when compared to gifts when both spouses are US citizens.
US Citizen Spouse vs Non-US Citizen Spouse
For spouses who are both US citizens, unlimited amounts can be transferred to each other while both spouses are living without incurring any gift tax. The reasoning behind this is that any assets in excess of the couple’s combined estate tax exemption ($24.2 million in 2022) will be taxed at the death of the surviving spouse. In this case, transferring assets to the survivor only defers the tax that the IRS will eventually collect.
A non-US citizen spouse may not be subject to the US estate tax at death. Thus in the case of a non-US citizen spouse, a US citizen spouse can transfer an initial $164,000 and then only the annual exclusion amount without being subject to the gift or estate tax.
