25 Jan How much money can I give without owing gift tax?

Q. How much money can you gift to children or grandchildren without triggering a gift tax. Is there a difference?
— Unsure

A. Yours is a common question.

The current rate for federal estate and gift tax is 40%, but most people never hit that level.

Here’s how it works.

Generally speaking, each calendar year, a person may gift up to $16,000 to someone else without incurring any federal gift tax, said Adam L. Sandler, an attorney with the Wills, Trusts & Estates and Taxation Group at Einhorn, Barbarito, Frost & Botwinick in Denville.

This was increased from $15,000 effective January 1, 2022.

“It does not matter whether the donor is related to the donee or not,” Sandler said. “A donor can give up to $16,000 to as many people as they like every year and each gift would qualify for the federal gift tax annual exclusion.”

Sandler said at the state level, New Jersey does not impose a tax on gifts made during life, although certain gifts made within three years of death may be subject to the New Jersey inheritance tax depending on the relationship between the donor and the donee.

“So, to my fellow New Jersey residents, feel free to give a $16,000 check to each of your children and grandchildren every year for the holidays without another thought about taxes,” he said. “They will certainly appreciate it.”

Yet, while people are always worried about that magic annual number, in reality, most do not have to worry because of the way our federal estate and gift tax regime is structured, Sandler said.

Each individual has a federal estate and gift tax exemption. This means that an individual can make a certain amount of gratuitous transfers during life and/or at death without owing any actual estate or gift tax, Sandler said.

The current exemption is $12.06 million per individual and is increased every year for inflation, he said.

“It is important to note that in 2026, the individual exemption is scheduled to return to a reduced amount of $5 million, which will be adjusted for inflation at that time,” he said, noting it’s called a “sunset” provision. “If the law remains unchanged, we estimate the actual individual exemption in 2026 will be approximately $6.5 million.”

Let’s take a closer look at the different tax consequences for gifts made during your lifetime versus what happens when you die.

Any “taxable” gifts made during an individual’s lifetime simply reduces the amount of their exemption, Sandler said. No gift tax is owed until the entire exemption is used and the gift tax is only assessed on amounts gifted in excess of the exemption, he said.

“It is very important to note that, unlike the annual exclusion, each individual has only one exemption,” he said.

Sandler offered this example: If Joe gifts $12.076 million to John, $16,000 of the gift will qualify for the annual exclusion and the remaining $12.06 million will consume his entire exemption. If Joe then gifts another $12.076 million to Mary, $16,000 of the gift will qualify for the annual exclusion, but Joe will owe gift tax on the remaining $12.06 million of the gift to Mary.

This means that Joe only has one exemption. He does not get $12.06 million of exemption for gifts to John and another $12.06 million for gifts to Mary, he said.

At death, a decedent’s estate will owe estate tax if the “taxable estate” exceeds the decedent’s remaining exemption — $12.06 million less all “taxable gifts” made during the decedent’s lifetime, he said.

To complicate this even further, certain gratuitous transfers made during life and/or at death are not subject to the tax and do not eat into your lifetime exemption, Sandler said. These include annual exclusion gifts, gifts to a spouse who is a U.S. citizen, gifts to charity and gifts for payment of tuition and medical expenses if paid directly to the educational or health care institution, he said.

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This story was originally published on Jan. 25, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.