Gifting Strategies for 2022

Gifting is always a nice gesture. However, as with most transfers of assets, there may be tax implications. Most gifts that exceed the annual gift tax exclusion of $16,000 per donee (2022) will create a federal gift tax return filing requirement. Two exceptions are payments of the recipient’s medical expenses or education tuition, both of which must be paid directly to the provider or institution to qualify for the exclusion.

On top of the annual gift tax exclusion, each individual is allowed a lifetime exclusion provided by the Unified Tax Credit. For the 2022 tax year, this exclusion is $12,060,000. A gift in excess of $16,000 can be applied to this exclusion which means no taxes are due on the gifts as long as the total lifetime gift amounts don’t exceed the exclusion limit, on a cumulative basis.

There are a variety of gifting options, including giving investments, funding an irrevocable trust, contributing to a minor’s Roth IRAs, and funding 529 college plans, that provide more “bang for your buck” when it comes to taking advantage of the exclusions and exemptions. However, when the recipient sells the investments, he or she will generally use the donor’s cost basis to calculate capital gains or losses, effectively transferring capital gains tax obligations from the donor to the recipient.

Irrevocable trusts are useful for beneficiaries who are not yet capable of handling large sums of money, where there are concerns about shielding assets from creditors or where the amount and timing of each beneficiaries’ share is to be decided in the future. Such trusts allow the donor to spell out how the funds will ultimately be distributed. The drawback of such a trust is that once the assets are gifted, the donor cannot take back (revoke) the transfer nor retain control over many aspects of the trust operation.  Gifts contributed to irrevocable trusts are considered a “future interest,” which do not qualify for the annual gift tax exclusion. For the annual exclusion to apply to such gifts, the trust language must include a provision that allows the beneficiaries the right to withdraw the gift for a short period.

Consider contributions to a minor’s Roth IRA. Any adult can create a custodial account to contribute to on behalf of a beneficiary who is under the age of 18. The beneficiary must have employment compensation, babysitting and lawn mowing count, and contributions may be no more than the minor’s earnings, capped at $6,000 per year for 2022.

There are also gifts to help with future education expenses. 529 plans are savings plans intended for higher education expenses and are available in most states.  Gifts to these plans have special rules that allow the donor to “front load” the annual exclusion for five years, allowing more time for tax-free growth. Maryland, for example, offers two options: the College Investment Plans and the Prepaid College Trusts. A College Investment Plan uses contributions to fund a selection of investment options managed by T. Rowe Price. A Prepaid College Trust uses contributions to lock in future tuition prices at today’s prices with flexible tuition plans and payment options while being backed by a Maryland Legislative Guarantee. Distributions are tax-free when used for qualified education expenses. After The Tax Cuts and Jobs Act of 2017, funds from the College Investment Plans can also be used to pay for private primary and secondary school on top of higher education.

Although the 529 plan contributions are not deductible on the federal level, many states offer their own state income tax return benefits. Maryland offers a $2,500 deduction per beneficiary per year or $5,000 for married taxpayers filing jointly with a 10-year carryforward of excess contributions. To illustrate, if a single parent contributes $10,000 towards his or her child’s Maryland 529 plan by December 31, 2022, they may take a $2,500 deduction on their Maryland income tax return for 2022 and each subsequent year until 2026, assuming no subsequent contributions.

These are just some of the available gifting strategies. Please keep in mind that laws and limits may change and are often more complicated than explained in this short summary. If you have any questions or concerns, or if you would like more details before making decisions, Snyder Cohn is always available to help.


By Doris Truong