Below we'll discuss the new 2022 rules for estate and gift taxing released by the IRS. To start, you should know that there are 2 types of gift taxes and exemptions - annual and lifetime exemptions.

The annual gift tax exemption level has risen from $15,000 to $16,000, meaning you can gift out that much per year and never pay a tax. Remember, only the giver pays the taxes, not the recipient. This is the first increase of the annual gift tax level since 2018.

This gift only applies between two parties as well. That means the giver can gift $16,000 to person A and another $16,000 to person B and still not pay a gift tax. Taking that further, a couple could also each gift $16,000 to the same person and still not pay a gift tax. Gift taxes only kick in when gifting over the exemption level, now $16,000, to one person.

However, the other type of gift tax is a lifetime gift tax exclusion and is tied to the current federal estate tax level. Beginning in 2022, at the start of this year, the gift and estate tax exemption levels have risen to $12.06 million per individual from $11.7 million in 2021. This is according to the latest IRS inflation-adjusted numbers. Additionally, you should keep in mind that one's annual gift tax exemptions do not count towards one's lifetime gift tax exemption level. That means one could gift up to $16,000 to person A, and another gift of $100,000 and still not pay a tax as they used their annual gift tax exemption and a small portion of their lifetime gift tax exemption, even if both gifts are done in the same calendar year.

All this means is that those looking to gift money or provide an inheritance to their intended beneficiaries have a higher threshold to meet before causing a taxable event.

You may see these numbers and think that they are so high that they will never even apply to you. While yes, a gift of $12 million or even $16,000 is no small feat by itself, there are situations wherein most of us may have to operate around these rules - the qualification for public benefits for long-term medical care. For example, here in California, we have Medi-Cal (that is California's administration of the federal Medicare program for California residents), and to qualify for these benefits, one's estate and income needs to conform to set rules and guidelines. Additionally, Medi-Cal even has a process for how to arrange one's estate to qualify without creating a "period of ineligibility." This is a complicated process and one we would never recommend one do on their own without first consulting an attorney. Our office assists our clients with navigating this process by taking not only Medi-Cal's rule into account, but the IRS's gift taxing rules as well, thus these rules even effect those with, for instance, a house and even a little money in the bank.

Of course, the main consideration for estates large enough to have to worry about estate tax levels are taxes. Once an estate has exceeded the estate tax level, the taxes go up to around 40% meaning a large tax bill for the family to worry about at these higher thresholds. Some see this, along with the high exemption level, as an incentive to gift property away during life so as to hedge against future growth. For example, my parents gift me their house when it is worth $300,000 because they expect it to grow in value quickly overtime, thus only using $150,000 each ($300,000 total value) of their lifetime gift tax exemptions. They've now hedged against future estate taxes, right?

Yes, but they may have created other problems. If someone is thinking they need to go out and gift away large portions of their estate prior to their death to hedge against the growth in the value of those assets, they should also consider that it may still be more tax advantageous to keep those large assets in their estate after death so that the recipient, the beneficiary, can receive the assets with a stepped-up tax basis for capital gains as of the date of death. For example, if my parents have a house they purchased for $200,000 but is worth $500,000 when they died and passed in on to me, then I can sell the house for $500,000 and pay $0 in capital gains taxes since my tax basis (the price I acquired the property at) was also $500,000. Tax-wise, it is akin to me having not made any money on the acquisition and subsequent sale of that home.

Conversely, if my parents gifted me the home during their lifetimes, when it was worth $300,000, and I later sell the property for $500,000, then my tax basis for the property is actually $300,000, even if my parents passed away the day before that sale. Because I acquired the property when it was worth $300,000, that will determine my capital gains tax and I would be paying taxes on that $200,000 growth in value rather than $0 had my parents simply kept it throughout their lifetimes.

To wrap up, here are some final points to keep in mind as well:

Firstly, there are other capital gains exemptions that can apply on the sale of real estate, but those are topics for another video.

Secondly, gifts can take many forms, not just cash or real property. However, one can make unlimited direct payments for medical and tuition expenses for as many people as they'd like, with no gift or estate tax consequences - a very powerful tool to help others.

Third, as we are in the realm of taxes, we are in the realm of politics meaning these numbers are always subject to change. The reason they are what they are now is due to the passage of the 2017 Tax Cuts and Jobs Act which doubled the estate tax exemption from $5.49 million in 2017 to $11.17 million in 2018, indexed to inflation. This is set to sunset in 2026 meaning it would be cut in half at that point. However, an earlier version of the Build Back Better Act cut this exemption in half but was later removed in negotiations in November 2021. Do not be surprised if estate and gift tax exemptions continue to be bargaining chips on future legislation.

Finally, some states levy their own gift and estate taxes, so this information, while federal, may not provide a complete picture of your prospects depending on where you live. Here in California, we have no state gift or estate tax, meaning we only need to worry about those at a federal level.

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