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Estate and Gift Tax Limits

Home model tied with pink ribbon on bokeh in the public park, The buy new house or real estate as gift to family or the one loved concept.

Giving gifts to family members and other loved ones is not only an emotionally satisfying endeavor; it can also serve to reduce the future tax burden of your estate. When you pass away, the federal government levies a tax on the property you pass to your heirs. The tax tends to matter only to the wealthiest individuals because there is a hefty exemption that prevents most estates from paying any federal estate tax. According to the federal Joint Committee on Taxation, 99.8 percent of estates owe no estate tax at all. However, it’s still important for all individuals to understand how the estate tax works, where the limits lie, and how to limit liability if you may be approaching the estate tax limit. Below, we discuss the estate and gift tax limits and the effect of the annual gift tax exemption. If you need help planning your estate, call a knowledgeable Vancouver estate planning attorney.

Estate and Gift Tax Exemption

The federal estate and gift tax exemption applies to the total of an individual’s taxable gifts made during their lifetime and upon their death. An individual’s “gross estate” includes the fair market value of all an individual’s assets at the time of death, regardless of the price paid or value assessed when acquired. Property includes cash, real estate, business interests, and other assets. Certain deductions are then made, which leaves the “taxable estate” behind. Deductions include things like mortgages and other debts, property passing to surviving spouses and certain charities, and others.

After the net amount of the taxable estate is determined, the estate must then add the value of taxable gifts made by the individual throughout their lifetime. The tax will then be computed based on that amount.

Only estates valued above a certain amount will be taxed, and tax will be levied only on the amounts in excess of the limits. Any amount below that is exempt from the estate and gift tax. The exemption was doubled in 2018, and it will continue to rise over the next few years with inflation. For individuals who died in 2020, the estate and gift tax exemption was $11.58 million. For individuals who pass away in 2021, the exemption is $11.7 million. For married couples, the exemption is doubled.

An unmarried individual who gave away $5 million in taxable gifts during their lifetime and has an estate worth $10 million at the time of their death in 2021, for example, would need to file an estate tax return. They would be taxed on $3.3 million of their estate.

Annual Gift Tax Exemption

Individuals can give away up to a certain amount in gifts each year without contributing to the lifetime gift and estate tax exemption. By relying on this exemption, no amount of the gift given away will count against an individual’s $11.7 million lifetime exemption.

Currently, the annual gift tax exemption is $15,000 per donor, per recipient. Married couples sharing an estate thus get an exemption up to $30,000, and they can give $30,000 to as many individuals as they choose without affecting their lifetime exemption. For example, a married couple with a married daughter and son-in-law, along with three grandchildren, could give $30,000 to each of these five relatives (totaling $150,000) every year without touching the lifetime exemption.

Gifts can be made to friends, family, or even strangers. Certain other types of gifts are free of any gift tax. Paying tuition or medical expenses for a relative is not considered a taxable gift, so long as it is paid directly to the institution.

Covered gifts made to any individual in a given year in excess of these amounts will be counted against the lifetime exemption, and the parties need to file a gift tax return to alert the IRS of the gift.

Watch Out for Estate Taxes at the State Level

This blog post only addresses the federal estate and gift tax. Washington state imposes their own estate taxes at the state level, and the threshold for falling prey to these estate taxes is much lower than it is for the federal estate tax. We’ll look at the estate tax in Washington in our next post.

Vancouver Attorney John Lutgens is Ready to Assist With Estate Planning Matters in Washington State

For experienced and thorough legal help planning for your financial future in Vancouver, or elsewhere throughout Washington, contact Vancouver estate planning lawyer John Lutgens for a free consultation at 360-693-2119.

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