How much can a parent gift a child tax-free in 2021?

The existing gift tax entitlement lets individuals transfer millions to friends and family, but new proposals would severely limit the tax-free allocation.

How much can a parent gift a child tax-free in 2021?

The gift tax is a federally-levied tax that affects transfers of money or property when the donor is getting nothing, or less than the full value, in return. The gift tax only kicks in for individuals who are making considerable donations, but there are plans to alter the tax-free allocation.

How much can you gift tax-free?

In 2020 and 2021 the IRS’s annual gift tax exclusion was $15,000 per recipient, with an $11.58 million lifetime exclusion. This means that any gift transfers that fall beneath these thresholds would not be subject to federal taxation.

Those are the base figures but there is an important distinction to be drawn between the recipient and the donor, which currently allows individuals to gift to as many different people as they want. You may only give $15,000 worth of tax-free assets (cash, stock, land, etc.) to any one person, but could make multiple donations of less than $15,000 to different people.

Furthermore, a married couple is able to gift a total of $30,000 per year to any one recipient because their individual tax-free entitlements would be combined.

If your payments exceed these level you will need to file IRS Form 709 to disclose the gift. Any transfers which go to non-profit organisations are classed as charitable donations, so are not included in the gift tax.

Sanders tables proposed changes to the gift tax system

Senator Bernie Sanders has released new proposals for a reformed estate and gift tax with the backing of Senators Kirsten Gillibrand, Jack Reed and Chris Van Hollen. Sanders unveiled his 18-page bill on Thursday March 25 and Representative Jimmy Gomez is reportedly preparing to introduce a version of it in the House of Representatives.

The headline change would be a reduction of the lifetime exclusion entitlement from over $11 million to $1 million from 2022 onwards. It is thought that this would only affect payments going forward and could not be applied retroactively.

Another change included in the bill is the introduction of a donor limit of $30,000 per person, which will prevent individuals making multiple tax-free payments to various people in one year.

There are plans to tie the annual gift tax exclusion to inflation with the entitlement increasing in increments of $1,000. This would also apply to the proposed donor limit which will continue to be twice the recipient limit.