529 Plans & Gift Tax

by John Schachter, EA

Each American taxpayer is allowed a lifetime amount of gifts before he owes gift tax. For 2022, the lifetime amount is $12.06M. 

Some gifts don’t count against that lifetime allowance. Those gifts are important. That’s because the portion of the lifetime allowance that is not used against gifts can be used against the value of the assets you leave when you die. If you use up the allowance, your estate is more likely to owe a hefty federal estate tax. 

$12.06M is historically high. Congress can, and does, move that floor around. We don’t know what the allowance will be when we die. As context, the proposal from the Democrats back in 2016 was for a $3.5M allowance. 

So, while burning off some of the allowance can actually be good planning, you want to take advantage of opportunities to preserve the allowance where you can. 

A taxpayer can make gifts of up to $16,000 for 2022 to any one person in a year without hitting that allowance. 

For gifts to 529 plans, a special rule lets you use up 5 years of the $16,000 all at once if you so choose. That way, a mom and dad can together fund a 529 plan for up to $160,000 and neither of them will hit their allowance. 

Note: each parent will have used up five years of annual allowances, however. So if in the following year you buy your kid a pony, the entire cost of the pony will count toward your allowance.

Questions? Talk to us. John Schachter + Associates can help you learn more about what sorts of expenditures will hit your allowance, and help you file a gift tax return – required if you want five-year front-loading for 529 plan gifts.