With the new tax law passed in 2018, there are few people who will be subject to the gift or estate tax. Here is an explanation why:
$15,000 Annual Exclusion
Every US person is allowed to give away up to $15,000 to anybody per year (even a complete stranger) without incurring any gift tax. It is $15,000 per person. So I can literally give $15,000 to 100 different people (in effect giving away 1.5 million) and not have to pay any gift tax. It also resets every year, meaning you can give $15,000 to the same 100 people in the following year and still owe no gift taxes. Please keep me in mind to include me when you are giving away your loot 🙂
$11,200,000 Lifetime Exclusion
Above and beyond the $15,000 exclusion, there is also a lifetime exclusion allowance of 11.2 million per person. So how does this work? Let say I wanted to give you $115,000 this year. Well, the first $15,000 is not taxable but now would I have to pay tax on the additional $100k that I am gifting to you? No, During the course of your life, currently you are allowed to give away up to 11.2 million from your estate. So, you would simply reduce your lifetime 11.2 million exemption by the $100k. You would need to file an annual gift tax return with the IRS to report the $100k gift that you are using against the lifetime exemption, but it would not be taxable. It is for informational purposes only. Assuming that you have less than 11.2 million in assets, then your heirs would never have to pay estate tax either at your death. If you gave away more than 11.2 million during your life and used up your lifetime exemption, then when you die, your assets would be subject to the estate tax.
If you are married, you can combine the lifetime exclusion, meaning that you actually have 22.4 million to use up! There are few estates in the US that are above this amount, so that means the majority of people benefit from this tax law. Just make sure that you each use separate checks when gifting to individuals. Doing this proves the source of the funds to the IRS and they will not challange who it is from.
If you have any questions regarding this or need assistance with gift or estate tax returns, please contact us.