The Internal Revenue Service has announced the 2022 inflationary adjustments to the estate and gift tax applicable exclusion (from $11.7 million in 2021 to $12.06 million in 2022) and to the annual gift tax exclusion (from $15,000 in 2021 to $16,000 in 2022).[1]
Currently (2022), the applicable exclusion is $12.06 million. The estate and gift tax applicable exclusion amounts are “unified,” meaning that a person can use the exclusion during their lifetime by making taxable gifts to others and any applicable exclusion not applied to lifetime gifts can be applied to property held at death. This means that a person may gift up to $12.06 million in assets during their lifetime or, if they make no taxable gifts, die owning assets totaling $12.06 million and pay no gift or estate taxes.[2] The current tax rate on lifetime gifts or estates worth more than $12.06 million is 40%. Under current law, the applicable exclusion is adjusted annually with inflation. Accordingly, it should increase modestly each year (the increase between the 2021 figure and the 2022 figure was $360,000). Notably, there was a substantial increase in the applicable exclusion in 2018. The Tax Cuts and Jobs Act passed in 2017 increased the applicable exclusion from $5.49 million (in 2017) to $11.18 million (in 2018) to $11.4 million (in 2019), to $11.58 million (in 2020), to $11.7 million (in 2021), and to $12.06 million (in 2022) but this substantial increase is only temporary and, barring Congressional action sooner, the applicable exclusion will return to its 2017 value (plus an increase for inflation) after 2025.
In addition to the increase in the applicable exclusion, the annual exclusion for gift tax increased from $15,000 in 2021 to $16,000 in 2022. The gift tax annual exclusion permits a taxpayer to exclude up to $16,000 per person per calendar year without any gift tax reporting requirement and the gifts won’t use any of the applicable exclusion amount (meaning that annual exclusion gifts do not reduce a taxpayer’s applicable exclusion). As a result, annual exclusion gifts are a very popular (and efficient) way to transfer assets.
The applicable exclusion and the annual exclusion are some of the important considerations in developing an estate plan and planning for the transfer of wealth; to read a more in-depth overview of estate planning concepts, click here.[3]
Brandon Rebboah is an associate in Berliner Cohen’s Estate Planning Group. Mr. Rebboah counsels individuals and families on estate planning, estate administration, probate administration, and tax matters. Additionally, Mr. Rebboah’s practice focuses on sophisticated wealth transfer strategies. He can be reached at brandon.rebboah@berliner.com or 408-286-5800.
[1] See, e.g., Rev. Proc. 2021-45 (2021).
[2] The applicable exclusion is available to U.S. taxpayers (including U.S. citizens and domicilaries) but is not available to nonresident aliens. For nonresident aliens, the estate tax exemption continues to be limited to a mere $60,000.
[3] Always consult with qualified professionals (attorneys, accountants, and otherwise) about your estate planning and/or gifting needs.