In this post, we are going to look at the annual gift tax exclusion, which can be increased at the beginning of a year when the IRS deems it necessary.
Before we focus on that subject, we will review the 2021 estate tax parameters, because the gift tax and the estate tax go hand in hand.
2021 Estate Tax Exclusion Increase
The estate tax carries a robust 40 percent rate so it can have a significant impact on your legacy. Fortunately, a very small percentage of families have to pay the tax because it is applied on the amount that exceeds the exclusion.
This credit or exclusion is quite high by most standards. In 2020, it was $11.58 million, and it was adjusted upward this year to $11.7 million.
Rules for Married Couples
If you are married, you can transfer unlimited assets to your spouse tax-free, because there is a marital deduction. However, the deduction is only available to American citizens so you cannot use it if you are married to a citizen of another country.
Why would this stipulation be in place? Even though you can transfer unlimited assets to your spouse tax-free, the IRS is not left out in the cold. Your spouse would be in possession of a taxable estate after his or her passing so the tax would still be looming.
On the other hand, if non-citizen spouses receive an inheritance tax free, they could simply return to their country of citizenship. The IRS would not be in a position to collect anything after their deaths.
Prior to 2011, the exclusion was not portable, and this means that a surviving spouse could not use the exclusion that was allotted to the deceased spouse. Many people contended that this was not fair because in most cases, the family wealth was accumulative by the combined efforts of two individuals.
This changed when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was enacted. It made the estate tax exclusion portable, and this provision has remained intact since then so a surviving spouse can now use two exclusions.
Federal Gift Tax and the 2021 Annual Exclusion
Anyone who is exposed to the estate tax at death might think about just giving gifts while they are living to avoid the tax, but there is a gift tax in place to close the loophole. The $11.7 million exclusion that we have this year is a unified exclusion that includes lifetime gift giving.
However, there is also a separate annual gift tax exclusion that you can use to give a certain amount to any number of gift recipients in a given year tax-free. (That is, you can a give $15,000 to one individual and another $15,000 to a second individual, and so on, without any gift tax.)
This exclusion can be increased to reflect the cost of living, but the status quo will remain in place in 2021. Last year, the annual per person gift tax exclusion was $15,000, and it will remain constant this year.
While we are on the subject of gift tax exclusions, we should point out that there are two other types of gifts that you can give tax-free. If you want to pay medical bills for others, there is no tax burden, and this exclusion extends to the payment of health insurance premiums.
There is also an educational exclusion that can be used to pay school tuition for students free of the gift tax. It is a tuition-only exclusion that does not cover books, fees, and living expenses, but you can use your annual exclusion to provide additional support.
Of course, $15,000 is not much if you want to pay for all expenses, but a married couple can combine their respective exclusions and provide up to $30,000 annually tax-free.
Take Action Today!
Even if you are not exposed to the estate tax, you should work with an attorney to create a custom crafted plan that is right for you and your family.
You can schedule a consultation at our office in Charlotte, North Carolina or Huntersville, North Carolina if you call us at 704-944-3245. The number in Ashland, Kentucky is 606-324-5516, and you can use our contact form if you would like to send us a message.