Each year, the IRS considers inflationary adjustments to the estate and gift tax exemption amount and gift tax annual exclusion amount. As you consider estate planning or making gifts during the new year, here are the numbers that were published for 2022:
2022 Exemptions and Exclusions. The estate and gift tax exemption amount has increased from $11.7 million per person to $12.06 million per person in 2022. Clients who have previously fully used their exemptions can now make gifts of an additional $360,000 over the annual gifts discussed below. The 2022 generation-skipping transfer tax (GST tax) exemption amount has also increased to $12.06 million per person. However, if no action is taken by Congress to change the current law prior to December 31, 2025, these heightened exemption amounts will revert to pre-2017 Tax Act levels of $5 million per person (as upwardly adjusted for inflation) on January 1, 2026. Projections show that the exemption would be approximately $6.5 million per person at that time. The current higher exemptions provide an excellent opportunity for planning lifetime transfers to minimize total taxes for clients whose estates are larger than $6.5 million. Gifts also continue to be advisable for clients in Washington and Oregon where we have a state estate tax, but the tradeoffs should be considered as discussed here.
Annual Gifts. Every year, each person is allowed to make a gift to another person up to a certain amount without incurring any gift tax liability – this is known as the “annual exclusion.” The annual exclusion is a powerful tax saving tool because the person making the gift can transfer wealth without using any of his or her estate and gift exemption amount and without needing to file a gift tax return. After many years of the annual exclusion being $15,000, the IRS has increased the annual exclusion to $16,000. This means that a donor can give up to $16,000 to an unlimited number of persons without incurring gift tax or the obligation to file a gift tax return. For example, married couples can give each child and grandchild up to $32,000 in 2022 without incurring any gift tax liability and without using any estate or gift tax exemption.
January 2022 Interest Rates. Continuing with the trend of record low interest rates, the IRS has released adjusted applicable federal rates (AFRs) for January 2022, which would apply to intra-family loans, for example. The annual short-term (under three years) is 0.44 percent, annual mid-term (three to nine years) is 1.30 percent, and annual long-term (more than nine years) is 1.82 percent.
Planning Opportunities. Current factors, such as depreciated asset values resulting from the COVID-19 pandemic, record-low interest rates, and historically high estate and gift tax exemption amounts, provide unique opportunities to minimize your and your family’s tax exposure. In previous alerts (see Gift-Giving and Other Planning Under the New Political Landscape, Using Spousal Lifetime Access Trusts to Lock in High Estate Tax ExemptionAmounts, and Low Interest Rates Create Planning Opportunities), we discussed several tax-efficient strategies to consider. In addition, taking advantage of the higher exemption amounts now, particularly for individuals with an anticipated gross estate in excess of $6.5 million and couples with a combined estate over $13 million, should also be considered.
As we begin 2022, let’s start the conversation about tax-saving estate planning techniques that are available to you.