The gift tax annual exclusion allows an individual to make gifts without reducing the donor's lifetime gift tax exemption amount. The exclusion is capped, and gifts must take immediate effect to be eligible.
What is the annual gift tax exclusion amount for 2020?
The gift tax annual exclusion amount is determined by the Internal Revenue Service on an annual basis. The IRS set gift tax annual exclusion for 2020 at $15,000 per donee.
What is the lifetime exclusion amount in 2020?
With enactment of the Tax Cut and Jobs Act in December 2017, the basic exclusion amount for gift, estate, and generation-skipping transfer taxes (the "transfer taxes") is now $10,000,000 plus an inflation adjustment per taxpayer. For 2020, the inflation adjustment for these transfer taxes is set at $1,580,000, meaning that each taxpayer has a lifetime exclusion amount of $11,580,000 through December 31, 2020.
Will the lifetime exclusion amount stay at this level?
Under current law, the basic exclusion amount will re-set to $5,000,000 on January 1, 2026; the inflation adjustment will still apply. The IRS has issued guidance providing that gifts made before 2026, which exceed the future, lower lifetime exclusion amount, will be honored.
If the upcoming elections result in a new administration, the new administration may attempt to reduce the federal budget shortfall with changes to the tax code. It is possible that the lifetime exclusion amount may be reduced as soon as 2021.
Planning for very large gifts by December 31, 2020.
If you are in a position to give very large gifts in 2020—gifts which exhaust or use much of your lifetime annual exclusion—you should consult your estate-planning counsel now. The combination of current market forces, which allow steeper-than-usual discounting of leveraged gifts, the certainty of a drop in the lifetime annual exclusion in 2026, and the possibility of a drop in the lifetime annual exclusion as soon as 2021, means that the last few months of 2020 are an excellent time to consider a major gift.
What payments are excluded from the annual and lifetime gift tax exemption?
A donor may exclude from his annual and lifetime gift tax exemption all gifts to his/her spouse as long as the spouse is a U.S. citizen, payments of tuition made directly to the donee's educational institution, and payments for medical expenses (including medical insurance) paid directly to the donee's medical or medical insurance provider.
A donor can make a front-loaded gift of up to $75,000 to a 529 College Savings Plan and make an election to have this gift treated as made over five years, thus qualifying for the annual exclusion for those five years. This front-loaded gift requires the donor to file a Gift Tax Return with the Internal Revenue Service, which reports the gift and makes the five-year election. One hazard: if the donor dies before the five-year term has expired, the gifts for the remaining portion of the five-year term are pulled back into the donor's estate for estate tax purposes.