Annual Exclusion

What Is the Annual Exclusion?

The annual exclusion is the amount of money that one person may transfer to another as a gift without incurring a gift tax or affecting the unified credit. This annual gift exclusion can be transferred in the form of cash or other assets. For 2019, the Internal Revenue Service (IRS) announced the annual exclusion will remain at $15,000. This is up from $14,000 in 2014, 2015, 2016 and 2017.

How Annual Exclusion Works

The annual exclusion applies to each gift made. For example, if grandparents gift several thousand dollars to each of their grandchildren, each amount will be considered for an annual exclusion separately. While any gift is generally a taxable gift, exceptions do exist. For example, the following gifts are not taxable:

Gifts to qualifying charities are also deductible from the value of the gift(s) made. Otherwise, taxpayers cannot deduct the value of gifts they make. IRS Publication 559, Survivors, Executors, and Administrators lays out the specifics in this regard.

To be approved for an annual exclusion, taxpayers must submit copies of appraisals, copies of relevant documents regarding the transfer, and any documentation of unusual items shown on the return (such as partially-gifted assets).

Annual Exclusion and Estate Tax Exemption

The $15,000 annual exclusion means you can give $15,000 to as many people as you want. So you can give each of your five grandchildren $15,000 apiece in a given year, for a total of $135,000. Any gifts you make to a single person in excess of $15,000 count toward your combined estate and gift tax exclusion. This is the amount you are allowed to leave in your estate or give as gifts during your life, tax-free.

For 2020, the lifetime gift tax exemption is $11.58 million. This means that if you are married, you and your spouse can give away a total of $23.16 million before paying the gift tax. For 2021, the numbers are $11.7 million and $23.4 million. These new exemption thresholds were established by the Tax Cuts and Jobs Act (TCJA), which expires in 2025. The TCJA more than doubled the federal estate and gift tax exemption, which was previously about $5 million. Subsequent to the TCJA, the number of taxable estates in the U.S. plummeted to 4,687 in 2013 to 1,890 in 2018.

Annual Exclusion and Wealth Management

Annual exclusion and estate tax exemption are often considered as part of a larger wealth management plan or estate plan. A high net worth individual (HNW), for example, could enlist the support of a wealth management firm or independent financial advisor to determine how best to allocate financial and other assets via gifts or in a will in order to avoid heavy tax penalties.

A will is a legal document that provides clear instructions on how an individual’s property and custody of minor children, if any, should be handled after death. In a will, an individual expresses her wishes and names a trustee or executor to fulfill the stated intentions. The will can also indicate whether a trust should be created after death. If a will includes instructions on gifts, this section will determine any tax liabilities for the estate or beneficiaries.