The IRS recently announced annual inflation adjustments for the 2022 tax year on several tax provisions. Some of the affected provisions include: the estate tax unified credit, annual gift exclusion, standard deduction amounts, and personal income tax rates. Below is a summary of the inflation adjustments effective this year as they relate to estate and gift taxes.
|Federal Exclusion||State Exclusion|
At the federal level, the estate tax is referred to as a “unified credit,” meaning that the exclusion amount is the total amount excluded from taxes for taxable lifetime gifts plus gifts at death. In contrast, the Oregon exclusion only applies to gifts at death, because Oregon does not have a gift tax.
Federal Gift Tax Exclusion
This year, the federal annual gift tax exclusion increased to $16,000 per person, up from $15,000 the previous year. The exclusion amount is the amount that you can gift an individual annually without having to file a federal gift tax return or eat up your lifetime unified credit.
Married couples who file together can gift $32,000 per person annually through gift splitting. In gift splitting, married couples can combine their annual gift allowance as if each contributed half of the gift value. However, if you plan to gift split, you should proceed with caution to make sure all appropriate requirements are met. Other exclusions to gift taxes apply to things like payment of tuition and medical expenses, gifts to spouses, and gifts to political organizations.
What Happens if You Gift Over the Exclusion?
If you make a gift that is larger than the annual exclusion amount, it’s referred to as a “taxable gift.” The term taxable gift is a little bit of a misnomer because no one is paying taxes on it quite yet.
When you make a taxable gift, you trigger a filing requirement to file a gift tax return (Form 709). The taxable amount is the amount you gifted, less the exclusion. (e.g. I gift my sister $20,000. The amount that is “taxable” is $20,000 -$16,000 = $4,000) When you make taxable gifts, the taxable amount reduces your unified credit by the taxable amount. Only once your unified credit is reduced to zero do you pay federal estate taxes.
What Happens to Gifts Made after Federal Sunset?
In Oregon, large taxable gifts are often used as an estate planning strategy to reduce the impact of the Oregon estate tax. The basics of the strategy are as follows: If we can reduce the value of someone’s gross estate before they die through lifetime gifts, and the donor and recipients of those gifts won’t incur any taxes, and we will avoid or reduce paying Oregon estate taxes, why not? However, this strategy hinges on the current federal exclusion being so large that most Oregonians will not exceed the exclusion amount, even if they gifted away all their assets.
When the Tax Cuts and Jobs Act (TCJA) went into effect in 2018 the federal unified credit doubled, and the amount is adjusted annually for inflation (see above). However, unless additional legislation is passed, the rates are set to sunset to their pre-2018 levels after 2025. The question then becomes, what happens to someone’s exclusion if they make a bunch of large gifts and then the exclusion is lowered?
The IRS has clarified that if an individual has taken advantage of their increased exemption between 2018-2025, they will not be harmed when the exemption amount drops. The IRS regulations have allowed for an estate to compute is estate tax credit using the “greater of the BEA [Basic Exclusion Amount] applicable to gifts made during life, or the BEA applicable on the date of death.”
For more information about how to plan for anticipated changes in gift and estate taxes, please contact our office to schedule a consultation.