Overview

Main Menu Name: Exclusion

Calculates the estate tax savings possible through the use of the annual gift tax exclusion.

In this article:

• Background
• Getting Started
• Entering Data
• Results

Background

Calculates the estate tax savings possible through the use of the annual gift tax exclusion.

In 2024, donors can donate $18,000 worth of gifts to any number of persons or parties each year, tax free. This allows taxpayers to make many small gifts without recording or reporting them. The maximum amount that may be excluded is calculated by multiplying the number of persons given gifts by the annual exclusion amount. The annual exclusion amount may change each year.

If the donor is married, his spouse may sign the donor's gift tax return as an indication that each spouse donated half the gift, even if the gift was actually donated by one spouse. Therefore, the per-donee exclusion increases to twice the annual exclusion amount, or $36,000 each year.

An annual exclusion is permitted only for "present interest" gifts. A gift is considered present interest when the person receiving the donation has immediate, unfettered, and ascertainable possession, use, or enjoyment of the gift when it is made. A future interest gift is one in which the possession or use or enjoyment of the gift is deferred - even for a moment. Future interests include reversions and remainders.

Single transfers are sometimes two gifts that have to be separated for tax purposes. One gift may be a present interest that qualifies for the annual exclusion, while the other gift may be a future interest that does not qualify for the annual exclusion. For example, a donor puts $18,000 into a trust with a 12% interest rate. His son receives income annually from the trust for 10 years and his daughter is paid the remainder at the end of the 10 years. The son's income payments begin and "vest" (i.e., can't be taken away) immediately; therefore, the gift of the income stream is a present interest gift and qualifies for an annual exclusion. The daughter will not receive the remainder for 10 years; therefore, the gift of the remainder is a future interest and does not qualify for an annual exclusion.

This illustration shows the incredible estate tax saving power of small gifts made to a number of donees over a long period of time in a systematic manner.

Getting Started

Entering Data

1. Year:  Enter the current year.
   
   
2. Donor's Age:  Enter the age of the donor. Valid age entries are 5 to 115.
   
   
3. Number of Donees:  Enter the number of people receiving a gift.
   
   
4. Donee's Annual After-Tax Return on Gifts:  Enter the estimated after-tax rate of return the donee could potentially earn on the annual gift.
   
   
5. Single Annual Exclusion:  Enter the amount of exclusion that the donee has not already used or allocated for the year. The maximum annual exclusions were as follows:
   
      1982 - 2001:  $10,000
      2002 - 2005: $11,000
      2006 - 2008: $12,000
      2009 - 2012:  $13,000
      2012  - 2017:  $14,000
      2018 - 2021:   $15,000
      2022:               $16,000
      2023:               $17,000
      2024:               $18,000
   
   
6. Annual Exclusion Inflation Adjustment:  Enter the percentage of inflation for the current year.
   •  
   • Note: The Amount of Exclusion increases by the Annual Exclusion Inflation Adjustment amount each year starting in 1999. If the Year is prior to 1999, the Inflation Adjustment is applied only once to reach 1999.
     
     
7. Donor's Hypothetical Estate Tax Bracket:  Enter the estate tax bracket that the donor is likely to be in at death.
   
   
8. Take Advantage of Gift Splitting:  Select the check box to assume that the donor and the donor's spouse are both signing the gift tax return, indicating that half the gift is being given by each spouse. This doubles the Annual Exclusion for each year.

Results

The Summary Tab displays the estate tax or generation skipping transfer tax savings possible through use of the gift tax annual exclusion. To calculate the tax savings possible, the calculation multiples the number of donees receiving gifts by the amount of the annual exclusion available for each. It then multiplies that total by the donor's life expectancy based on the government's table in the regulations. This result is then multiplied by the federal estate tax bracket specified at the Donor's Projected Estate Tax Bracket entry field. The result is the potential federal estate tax or generation skipping transfer tax savings if the annual gifts are not invested by the donee.

The calculation then uses the rate specified in the Donor's Annual After-Tax Return entry field to calculate the potential estate tax savings. This value, displayed in the results, is the amount that would have been owed the government if no gifts had been made. The calculation determines this value under the assumption that the donee invested the annual gifts at the after-tax rate specified.

The Table Tab displays the Annual Exclusion, Number of Donees, Value of Gift, Estate Tax Savings, Cumulative Gifts with Growth, and Cumulative Estate Tax Savings for each year.