As you get older and see your investments grow, you may decide you want to share your wealth with your loved ones. You may want to give each of your children money toward a down payment on a house. You may want to gift your grandchildren money toward their college tuition.
The gift tax threshold for 2020 and 2021
One thing you need to think about when deciding to gift money to your loved ones is if you will face a gift tax as a result. For 2020 and 2021 tax years, the annual gift tax exclusion is $15,000 – meaning you can give a loved one $15,000 without needing to pay a gift tax. If you have two children and give them each $20,000 in 2021, you will face paying a gift tax on $10,000 total – because you gave each child $5,000 more than the gift tax exclusion amount.
The lifetime gift tax exclusion amount for 2021 is $11.58 million. You also can impact what taxes will be taken from your estate when you die if you give away large amounts of money over the years. You may need to give the IRS information about gifts you give to loved ones, even if you don’t meet the gift tax threshold during one tax year. The IRS will track your gift giving to see if it meets the lifetime tax exclusion amount.
Avoiding gift taxes
To avoid paying gift taxes, you can pay directly for a family member’s education, their medical bills or their wedding reception costs. You could pay for your daughter’s kitchen renovation as a way to increase her equity in her home.
If you want to avoid paying gift taxes on your estate when you pass away, you should consult an experienced estate planning attorney. You likely want to maximize what assets your heirs will receive and minimize gift taxes when you die.
Planning ahead to avoid minimize gift taxes can help you manage your assets well and still ensure you share more of your wealth with your family while also avoiding problems with the IRS.