Annual Gift Tax Exclusion
In 2021, you may gift property and/or cash with a value of up to $15,000 to a person without the gift being considered a “taxable gift”. This amount that you are able to gift each year before making a taxable gift as the Donor (i.e., the person making the gift) is referred to as the “Annual Exclusion Amount”.
You may also gift this amount to any number of individuals. So, for example, you could give up to $15,000 to your daughter, Rudolph, and $15,000 to your daughter, Prancer, without making a taxable gift.[1] An additional component of the Annual Exclusion Amount is that each spouse of a married couple may make an individual gift of up to $15,000 to the same person. This means that you could gift $15,000 to your daughter, Rudolph, and your husband could also gift up to $15,000 to your daughter, Rudolph, and generally neither gift would be deemed to be a taxable gift. This type of gifting also does not have to be done in one lump sum, so you could give $5,000 in January of 2021 and $10,000 in December of 2021 if you were so inclined.
The Annual Exclusion Amount also allows for gifts of tangible property. We often get questions from clients about whether they should just give away that special item sitting in the corner now. Often, the answer is yes! If you own jewelry that you’re not wearing or enjoying and your granddaughter, Comet, loves to dress up in your fabulous bling – why not let her have those items now when you can watch the joy on her face as she shows off your gift. Of course, we also always try to ask if you are still enjoying those items. If you also love your fabulous bling and like showing it off, keep it until you’re no longer using it. Note that this also means holiday gifts count towards your Annual Exclusion Amount though, so if you’re planning on doing some big gifting this year, please remember to touch base with your CPA.
Even if you are planning on making a gift that is under the Annual Exclusion Amount, you should still discuss this strategy with your CPA, even though it likely wouldn’t be a taxable gift if it’s under the Annual Exclusion Amount.
Charitable Giving
In this season of gratitude, many of us are also considering how we might support those philanthropic causes most dear to our hearts. If this sounds like you, have you considered making a traditional charitable donation? If you are considering making a large cash gift to a public charity, you might consider speaking with a trusted advisor about completing this gift before December 31, 2021. This year is a particularly special year for making these types of large cash charitable gifts to public charities because while the charitable deduction on your tax returns is usually limited to 60% of your Adjusted Gross Income (AGI), this year you may be able to take a charitable deduction for an amount up to 100% of your AGI. For some people, this may mean completely eliminating their income tax liability for 2021 through making large cash gifts to public charities on or before December 31, 2021. Be sure to discuss your own strategy and particular circumstances with your CPA and/or tax advisor before completing the gift.
The Gift of Education
As an attorney, I might argue that there is no greater gift than the gift of education. Good news for all of “Santa’s Helpers” out there – you can generally gift unlimited amounts in the form of direct tuition payment and payment of qualified education expenses. This means that if you were thinking about giving your niece, Prancer, $30,000 to use for her veterinary degree, you might speak with a qualified advisor about instead directly paying $30,000 of her tuition for her in order to avoid that pesky taxable gift (since payment of tuition isn’t technically a gift).
Gifting Medical Care
Unfortunately, over the last two years we have all felt the tragic impact of COVID-19 and its variants. Even when we aren’t in the midst of a pandemic, many of us have loved ones who are in the hospital or need medical care. Fortunately, the Internal Revenue Code also generally allows taxpayers to pay directly for qualified medical expenses and/or care without it being a taxable gift.
‘Tis the Season
We have only touched on a few gifting strategies that are particularly relevant to estate planning here. If none of the above ideas feels right to you at this point in time, please also consider donating your time, making a modest cash donation, or even just sharing some care for those around you.
[1] Yes – I did say your daughter, Rudolph! Did you know that all of Santa’s reindeer are likely females? Both male and female reindeer grow antlers, but male reindeer antlers fall off around November and female reindeer keep their antlers through the winter. So, if Santa’s reindeer have antlers on Christmas, they are probably female!
Post by: Madison R. Jones, J.D., M.B.A.
Disclaimer: These materials are designed as a general overview and should not be relied upon for legal or tax advice. Please consult a qualified attorney and/or tax advisor for compliance and up-to-date information and advice specific to your circumstances.