IRS Announces Higher Estate and Gift Tax Exemptions for 2022

Editorial team of TFX

• 10.12.21 • 5 min read

The IRS has released its annual inflation adjustments for tax year 2022, which will affect provisions regarding estate and gift taxes. The new exclusion amounts will come into effect on January 1, 2022, for use by taxpayers when they prepare their 2022 federal tax returns in 2023.

Due to higher inflation rates in 2021, the lifetime exemption from federal estate and gift taxes for an individual is projected to increase by $360,000, from $11.7 million for 2021 to $12.06 million for 2022. 

And for the first time since 2017, the annual gift tax exclusion climbs to $16,000 per recipient for 2022, up from $15,000. Exclusion for gifts to a spouse who is not a U.S. citizen will increase to $164,000 for 2022, up from $159,000 for 2021.

These figures are subject to change and taxpayers are encouraged to regularly visit the IRS website for the latest tax news.

2022 Federal Estate Tax Exemption

When a person dies, their assets (also known as an estate) could be subject to the federal estate tax of up to 40%. However, federal taxes are only levied on estates that are valued above a certain threshold. 

For tax year 2022, that threshold increases to $12.06 million for individuals, or $24.12 million for married couples. This means that estates under this threshold are not subject to federal estate or gift tax. Individuals who have maximized their lifetime exemption may also give away another $360,000 in 2022.

Taxpayers may also choose to transfer assets to heirs during their lifetime to minimize exposure to the federal estate tax. The assets that comprise the estate are assessed on their fair market value, rather than their book value, which means that any asset appreciation is subject to the estate tax. Transferring assets early ensures that the gross value of your estate is reduced and any asset appreciation occurs outside of your estate.

Gifts to a spouse who is not a U.S. citizen are subject to limitations. Since non-citizens are not subject to the federal estate tax, the spouse who is a U.S. citizen cannot transfer all assets to the non-citizen spouse to avoid taxation. Instead, only the first $164,000 of gifts is excluded from federal estate tax.

It's important to note that the $12.06 million federal estate tax exemption is scheduled to revert to the original exemption of $5 million in 2026, with the amount indexed for inflation. The Tax Cuts and Jobs Act of 2017 temporarily doubled the exemption from 2018 to 2025.

2022 Gift Tax Exclusion

Another way to transfer assets to heirs is to maximize the annual gift tax exclusion. For tax year 2022, individual taxpayers can give up to $16,000 per year to as many recipients as you'd like without incurring tax or using up their lifetime exemption from federal estate and gift taxes. For married couples, the gift tax exclusion is doubled to $32,000.

For instance, a married couple with four children can gift $128,000 every year tax-free (with future amounts indexed for inflation) without touching their combined lifetime exemption. The gift could be any type of asset, including money and properties. You can set up special trusts, extend interest-free loans, or pay for medical or tuition expenses.