As you do your estate planning, you might have heard about the gift tax and how to avoid it. This article details how to avoid the gift tax in Illinois (there is no state gift tax, but there is a federal gift tax that applies in some situations – see below). If you have questions about gift taxes, our Illinois estate planning lawyers at Orlowsky & Wilson can help today.
The gift tax is a federal law that provides a yearly exclusion for estate tax purposes. As of Jan. 1, 2023, the gift tax annual exclusion is $17,000, and the gift and estate tax exemption is $12.92 million.
The exclusion is how much you can give from your estate to individuals and some trusts without tax consequences or using any gift and estate tax exemption. So, you can give up to $17,000 in 2023 as annual exclusion gifts to a child, grandchild, or anyone you see fit. It is common for people to make these gifts each year to reduce the size of their taxable estate.
The gift and estate tax exemption is how many assets you can transfer when you are alive or pass away without having gift taxes or estate taxes. Remember that lifetime gives that do not qualify for the yearly exclusion reduces how much of the gift and estate tax you receive when you pass away. Also, unless Congress takes additional action, the gift and estate tax exemption will drop by about 50% by the end of 2025.
If you give a gift to someone over $17,000 in 2023, the overage can be taxed. As you give more financial gifts, the overages can add up to a considerable amount. This means more of your estate will be taxed. To avoid gift taxes in Illinois or other starts, make sure your estate planning ensures that you do not exceed the annual gift tax exclusion.
There is no gift tax in Illinois. But, any amounts you gift above the federal gift tax exclusion reduces your estate tax lifetime exemption limit in Illinois. This is because the gift tax does not apply under Illinois laws, but everything gifted over the federal yearly exemption limit is counted against the $4 million estate tax exclusion for life.
Remember, if you make gifts above the federal exemption limit, you must pay taxes and file a gift tax return. However, depending on how close you are to the lifetime gift tax exclusion mentioned earlier, you may not have to pay taxes. You also can use the gift tax exclusion with yearly gift-giving programs, but it is not a complicated process with the help of an estate planning attorney.
It is always best to speak to an estate planning attorney to determine if financial gifts will have tax consequences at the state or federal levels. If you have questions about the Illinois gift tax, speak to our Illinois estate planning lawyers at Orlowsky & Wilson at (847) 325-5559.