Philadelphia, PA estates & probate lawyer Marc H. Jaffe explains how gift taxes work.
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Very few people have to worry about gift taxes if they want to make gifts. First of all, in Pennsylvania, there is no state gift tax, so we don’t have to worry about Pennsylvania tax. For federal purposes, there is a federal gift tax, but the exclusion amount today is $11.4 million. So unless you’re going to have $11.4 million when you die, or whatever you have combined with your gifts is going to be $11.4 million, gift tax is essentially irrelevant for you.
Back when the threshold was lower, there were things that we would use to reduce the exposure to gift tax. There’s something that the law calls the annual exclusion, and most people have a vague sense about that. They know that they can give away a certain amount of money. Right now it’s $15,000.00 per year per person without having some negative tax effect, but they really don’t even know what the negative tax effect is. What it is is the federal gift tax. So you can give away as many $15,000.00 a year gifts to as many different people as you want each year and it won’t reduce that $11.4-million lifetime threshold.
Other devices that were used are not as common anymore because of that high threshold, where you can make unlimited gifts for medical expenses as long as you paid it directly to the medical provider. You could make unlimited gifts for education expenses as long as you paid it directly to the school. So a grandparent could pay for their grandchild’s education by paying the school, and it wouldn’t eat into the grandfather or grandmother’s lifetime exemption. That lifetime exemption of $11.4 million is scheduled to be cut in half in the year 2026, but again for most of us, if we’ve got a lifetime exemption of $5.5 million, we’re really not going to have to worry about the gift tax. So the answer really is, do you have to worry about federal gift tax? If you do, you probably don’t have anything to worry about.