Estate Tax and Gifting Limits

Long ago, if you had too much money when you died, the government wanted part of it.  That's called "estate taxes."  Some folks call it "inheritance tax" or "death tax."  Sounds horrible either way.  Imagine if you visited Disneyland and as you left the park, an attendant charged you $50 to leave!  On a federal level, estate taxes are levied against an estate if the estate is worth too much when you die. After all, the government wants your family's money to fund various government programs, fix roads, etc.  However, most people don't have that problem anymore unless you have more than $12.06 million (this is called the "exemption" amount - the amount that is exempt from estate taxes).  Also a married couple can double that.  So that's a lot of money you can leave to your heirs and they won't need to worry about estate taxes.  Therefore, most people don't have enough money in their estate to be affected by estate taxes.  Also, California currently doesn't levy estate taxes unlike some other states which indeed impose an estate tax in addition to the federal estate tax.  

Also, the gift tax laws have changes a bit in 2022.  A married couple can gift any amount to one another without any gift tax implications.  However, there are limits to how much you can gift to a non-spouse.  You may have seen old movies where someone was on their death bed, signing away everything in their estate at the last minute.  Then they would die pennyless and the government would get no revenue from estate taxes.  The government grew wise to this tactic and imposed restrictions on how much a person could gift per year so people could not simply divest themselves of everything moments before dying.  These limits still exist even though estate taxes aren't much of an issue for most Americans.  

So how much can you gift to a non-spouse?  It use to be $15,000 per year per person.  Now it's $16,000 per year per person.  If you gift more than this, you will probably need to file a gift tax return with the IRS. You won't actually have to pay taxes, but the IRS wants to keep track of gifts that exceed the annual gift limit.  Spouses can double up on this as well.  For example, husband can gift his son $16,000 and wife can gift another $16,000 to the same son.  The recipient of the gift doesn't pay taxes either.  You can gift up to $12.06 million over your lifetime - again, not a problem for most folks! 

Remember that these numbers change year to year.  Make sure you talk to your CPA about any tax questions you might have as these laws are subject to change year to year.