An annual exclusion is the total sum of money that an individual can gift to another person without affecting the unified credit or having to pay a tax gift on it. This exclusion can be given by way of cash or another asset. For the year 2022, the IRS has set the annual exclusion limit at $16,000. The amount for 2021 was $15,000.
This exclusion applies to every gift up to the stipulated amount every year and not in total. The yearly exclusion plays an important role in helping determine estate tax exemption and also in wealth management.
Understanding annual exclusions
The annual exclusion limits apply to each gift made in the exempted category. The following is a list of gifts that are generally not taxable:
- Gifts that don’t exceed the annual exclusion limit set for the year
- Gifts that are made to a spouse
- Gifts that are given to a political organization
- Amounts paid for tuition or medical expenses
Gifts made to charitable organizations can also be deducted from the value of the gifts that are made during the year.
The annual exclusion applies to every gift made individually. For example, if a grandparent gifts thousands of dollars to their grandchildren individually, each amount can be taken separately and considered for the exclusion that year.
Taxpayers must submit copies of the documents related to the transfers made along with appraisal copies to be eligible for the annual exclusion.
Annual exclusion, estate tax, and wealth management
The yearly exclusion plays an important part in helping determine estate tax exemption and also in wealth management.
Estate tax exemption
Since the annual exclusion limit of $15,000 for 2021 is applicable to every individual gift given, you can give the sum of $15,000 or less to as many individuals as you want. For example, if you have 6 grandchildren, you can give each of them $15,000 for a total of $90,000 in a year. If you give any person a gift of more than $15,000, it will be counted toward your combined total for estate and gift tax exclusion.
The total value of gifts you can give to people over your lifetime is called the lifetime gift exemption. The limit for this in 2022 is $12.06 million per individual. For 2021, this amount was $11.7 million. If you’re married, you and your spouse can give a total of $24.12 million as of 2022 to people over your lifetime before gift taxes apply to you.
Wealth management
Estate tax exemptions and annual exclusions are normally included as a part of an estate plan or a wealth management plan that has a much wider scope. People who are categorized as high net worth individuals often get an independent financial advisor or a wealth management firm to help them ascertain how to divide and disburse their assets and financial wealth as gifts or through a will. This helps them avoid tax penalties that they would otherwise incur.
A will offers proper directions on how an individual wants their assets and properties to be handled and distributed after their death. Through the will, the individual can appoint a trustee or an executor to fulfill the instructions mentioned in it. The instructions related to any gifts that are to be transferred will also help calculate the tax liabilities for the beneficiaries or the estate.
