Each year, the IRS considers inflationary adjustments to the estate and gift tax exemption amount and gift tax annual exclusion amount. As you contemplate your 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. 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.
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. For many years, the annual exclusion has been $15,000. However, starting in 2022, the IRS announced that the annual exclusion is now $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. 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 tax exposure. In a previous alert, which can be found here, we discussed several tax-efficient strategies to consider, including intra-family loans; Grantor Retained Annuity Trusts; sales to Intentionally Defective Grantor Trusts; and Charitable Lead Annuity Trusts. In addition, taking advantage of the higher exemption amounts now, particularly for single individuals with an anticipated gross estate in excess of $5 million and married couples with a combined anticipated gross estate in excess of $10 million, should also be considered.
As we flip our calendars to 2022, let’s start the conversation about tax-saving estate planning techniques that are available to you. Please contact one of Michael Best’s Wealth Planning attorneys to explore planning opportunities, especially if you are considering making lifetime gifts.