Preserving & Protecting Your Family’s Assets & Legacy

When is a gift tax owed?

by | Sep 14, 2022 | Estate Planning |

It is not uncommon for the topic of gifting to come up during a routine estate planning consultation. A grantor can accomplish different things by gifting assets. Whatever the goal, once a client expresses interest in gifting, the question inevitably becomes: How much can I gift without having to pay a gift tax?

The reality is, under the current New York and federal tax laws, it is extremely unlikely that any person will incur a gift tax obligation. In New York, there is no gift tax, so a person can make unlimited lifetime gifts without having to worry about a state gift tax. There is a federal gift tax, but only if a person makes lifetime gifts that in total exceed the lifetime gift/estate tax exemption (the “Gift/Estate Tax Exemption”), which for 2022 is $12,060,000.00 for an individual, and $24,120,000.00 for a married couple.

The size of a gift is what determines its impact on the Gift/Estate Tax Exemption. If a gift does not exceed the Federal Annual Gift Tax Exclusion (the “Annual Exclusion”), which for 2022 is $16,000.00 to any one person during a calendar year, then there is no reduction to the Gift/Estate Tax Exemption and no federal gift tax return is required. If the gift does exceed the Annual Exclusion, the Gift/Estate Tax Exemption is reduced dollar-for-dollar by the size of the gift, and a federal gift tax return must be filed, even if there are no actual gift taxes owed.

Scenario #1: Assume grantor makes a gift of $10,000.00 to grantee during 2022. In this case, since the gift amount does not exceed the Annual Exclusion, grantor retains the full Gift/Estate Tax Exemption of $12,060,000.00, and grantor need not file a federal gift tax return.

Scenario #2: Assume grantor makes a gift of $20,000.00 to grantee during 2022. In this case, the gift amount does exceed the Annual Exclusion and, as a result, grantor’s Gift/Estate Tax Exemption is reduced by $20,000.00 to $12,040,000.00, and grantor must file a federal gift tax return. Even though no gift tax is owed (grantor still has plenty of exemption remaining), the gift tax return creates a record of the gift with the IRS.

There are many benefits to making lifetime gifts, both above and below the Annual Exclusion. Regular gifting below the Annual Exclusion can help reduce a grantor’s estate while allowing the grantor to keep his or her full Gift/Estate Tax Exemption. As an added benefit, not only is the asset removed from the grantor’s estate but also eliminated is the potential for growth and appreciation of the asset that would further increase the overall size of the grantor’s estate.

It is important to note that although the current Gift/Estate Tax Exemption is quite high, it is scheduled to “sunset”, or be reduced, to just over $6,000,000 after 2025. If you think you could benefit from adding gifting to your estate plan, you should consult with an experienced Estate Planning attorney.

By Wayne R. Carrabus, C.P.A., Esq., at Futterman, Lanza & Pasculli, LLP with offices in Smithtown, Bay Shore and Garden City, NY, and clients throughout metro New York. He concentrates his practice on Elder Law, Medicaid Planning, Medicaid Applications, Estate Planning, Probate and Estate Administration and Estate Taxes.


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