This is the amount of money one person can give another without paying a gift tax or impacting the unified credit for the year. It is possible to transfer this yearly gift exclusion as money or other assets. According to the Internal Revenue Service, exemptions for 2021 will stay at $15,000.

Explanation of Annual Exemptions

Per individual, per year, the yearly exclusion applies. If a grandparent gives a present to their grandkids totaling several thousand dollars, the donation will be treated as a typical yearly exclusion. On Jan. 1, a new year begins. As of Jan. 1, 2022, you can donate a single individual $15,000 on Dec. 31 of this year and $16,000 on Jan 1. If you give four $4,000 presents to your grandchild totaling $16,000 before Dec. 31, 2021, when the exclusion is set at $16,000, you've gone $1,000 above the 2021 limit, which is set at $15,000.

Examples of an Annual Exclusion Gift

Including an annual exclusion gift in a donor's yearly exclusion is possible. Gifts beyond the exclusion can be deducted from a recipient's taxable income using the yearly exclusion. Cash, equities, bonds, real estate, or debt forgiveness on a family loan in an amount not exceeding the annual gift tax exclusion are common kinds of yearly exemptions. Each year, the federal government determines the maximum amount of tax-deductible donations.

When Do You Need to Report Annual Exclusion Gifts?

Imagine that you and your spouse are both US citizens in 2022, and you decide to give the following gifts:

• Bob receives a $5,000 gift from you in March, followed by a separate $5,000 gift from you in December.
• Betty receives two $10,000 gifts from your spouse, the first in March and the second in December: $10,000.
• Susie received a gift of $2,000 from you in June.
• In December, you present your spouse with a $50,000 diamond ring.
• In December, your husband gifts you a $50,000 bottle of rare wine.

Tokens That Don't Require Reporting

You've given $62,000 in gifts in 2022, but due to the maximum marital deduction or yearly exclusion, none is taxed. The $10,000 to Bob, the $2,000 to Susie, and the $50,000 to your husband qualify for the yearly exclusion, as does the unlimited marital deduction. No part of the $50,000 you have donated this year needs to be reported.

Requires Reporting Gifts

While this may or may not qualify as an annual exclusion gift, your spouse made $70,000 in gifts in 2022. If you give Betty $20,000, you've exceeded the $16,000 yearly exclusion limit, but you may take $50,000 off your taxable income because of your marriage.

Betty's $20,000 payment? Is the $4,000 provided to her out of the $20,000 a taxable gift? Two things must be taken into consideration:

• The name(s) given to the account(s) in which the funds originated, and
• Whether or not you and your spouse agree to share the presents.

You and your husband can each contribute $16,000 to Betty if the presents originated from a joint account in both of your names. You and your husband would have to determine whether or not to divide Betty's present if it came from an account in your spouse's name.

Additional Factors to Consider

For estate planning and asset accumulation, the yearly exclusion is a critical component to keep in mind.

Exemption from Estate Tax

The yearly exclusion of $15,000 allows you to contribute $15,000 to as many individuals as you choose without worrying about it being taxable. In other words, you may gift each of your five grandkids $15,000 yearly, for a total of $135,000.

If you give more than $15,000 to a single individual, the amount counts against your lifetime exemption from estate and gift taxes. Tax-free bequests and lifetime contributions are limited to the sum set out above.

The exemption amount for gift taxes will rise to $11.7 million in 2021. If you're married, this means you and your spouse may give away a combined $23.4 million in gifts without incurring gift tax. The TCJA introduced these new exemption levels.

Financial Planning

An estate or wealth management strategy may include strategies such as the annual exclusion or the estate tax exemption. Wealth management firms and independent financial advisors can assist a high net worth individual (HNW) determine how best to distribute assets via gifts or in a will to avoid severe tax penalties. If an individual has a will, they indicate what they want to happen and designate someone to carry out their desires if they die.