The Tax Cuts and Jobs Act of 2017 increased the federal estate tax exemption to $11.18 million for 2018. That’s per person, so the combined exemption for a married couple can be as much as $22,360,000 worth of assets this year.

The same ceilings apply to the federal gift tax, which offsets the estate tax, but only for values over the “annual gift tax exclusion.” This year the annual gift tax exclusion was increased to $15,000, so your estate tax exemption would only be reduced by amounts gifted in excess of $15,000. For example, if you gave $20,000 to a family member, only $5,000 of that gift would have tax consequences. That $5,000 would have to be reported on IRS Form 709, and it would reduce your estate tax exemption by $5,000. The recipient of the gift would pay no taxes.

Real world relevance

Most people won’t have estates close to $11 million, so this exercise might seem academic. Still, the $15,000 annual gift tax exclusion can have practical effects in many situations. It’s also worth noting that paying someone else’s medical or education bills directly won’t be included in the $15,000 allowance. For example, if you directly pay $50,000 in medical or tuition bills for a loved one, that $50,000 payment would not count against your annual $15,000 gift tax exclusion. This $50,000 gift would not be taxable, and you would not have to file a gift tax return (assuming you made no other gifts).

Paired planning

Other possibilities exist if a married couple holds assets jointly, perhaps in a bank or brokerage account. A gift from such an account, or a gift of other property, by one spouse can be considered to be divided equally between the two spouses, so the annual gift tax allowance effectively increases to $30,000. There are two ways to do this. The easy way would be for each spouse to write a separate check for $15,000. If this is not practical, the spouses can get the benefit of a $30,000 annual exclusion by electing “gift splitting” on Form 709.

This article carries no official authority, and its contents should not be acted upon without professional advice. For more information about this topic, please contact our office.