UPDATE: The Treasury recently announced tax changes and updates in response to COVID-19, updates include an extension of the first installment of tax year 2020 quarterly estimated taxes to July 15, 2020. Some information in this post however requires additional IRS guidance and may require updating. We will update as soon as we receive additional guidance. Please see the latest information on tax deadlines and updates related to COVID-19 here.
The gift tax only kicks in after lifetime gifts exceed $11.400 million in 2019
The first thing to know about the federal gift tax is that gift givers—not gift recipients—have to pay it. Thankfully, you won’t owe the tax until you’ve given away more than $11 million in cash or other assets during your lifetime.
The lifetime exclusion was raised to $11.400 million in 2019. If you’re married, your spouse is entitled to a separate $11.400 million in 2019. So actually owing the gift tax is not a concern for most folks. But you may still have to file gift tax returns even though you don’t owe any tax. So please keep reading.
The annual gift tax exclusion provides additional shelter
The annual federal gift tax exclusion allows you to give away up to $15,000 in 2019 to as many people as you wish without those gifts counting against your $11.400 million lifetime exemption. (After 2019, the $15,000 exclusion may be increased for inflation.)
Say you give two favored relatives $20,000 each in 2019 and give another relative $10,000. The $20,000 gifts are called taxable gifts because they exceed the $15,000 annual exclusion. But you won’t actually owe any gift tax unless you’ve exhausted your lifetime exemption amount.
Assuming you haven’t, the two taxable gifts simply reduce your lifetime exemption by $10,000 [($20,000 – $15,000) x 2 = $10,000]. The other gift of $10,000 is ignored, because it’s below the $15,000 annual exclusion for 2019.
If you give three individuals $15,000 each in 2019, these gifts are ignored because they don’t exceed the annual exclusion.
Gift taxes and estate taxes are connected
You have a $11.400 million federal estate tax exemption for 2019. You can leave up to that amount to relatives or friends free of any federal estate tax. If you’re married, your spouse is entitled to a separate $11.40 million exemption.
Gifts made during your lifetime will reduce your taxable estate. However, gifts in excess of the annual exclusion also reduce your estate tax exemption. In the earlier example, the two $20,000 taxable gifts made in 2019 would reduce your estate tax exemption by $10,000 to $11,390,000 ($11,400,000- $10,000), based on the recently enacted changes in estate law. The $10,000 gift in 2019 and the three $15,000 gifts in 2019 would not reduce your estate tax exemption.
Bottom line: Making annual gifts up to the exclusion ($15,000 in 2019) is a good way to reduce your taxable estate without any negative side effects.
Special rule for 529 plan contributions
Contributions to a 529 college savings plan are