Unwrapping the Gift Tax: A Guide to Annual and Lifetime Giving

By Mary Louden, JD, LLM & TaraLynn Reinhart, JD | Mar 18, 2024 |

Many people have goals of transferring wealth during their lifetime—many do so by dispersing millions worth of gifts. But along with the gratitude you get from those you gift to, you may also receive a bill from the IRS for exceeding exemptions. A gift tax may be your unwelcome reward. 

Plan the size and cadence of your gifting so that your gift doesn’t cost more than you intended. 

What is the gift tax?

The gift tax is a tax imposed by the United States federal government on transferring money, property, or assets from one individual to another, where the donor (the person giving the gift) does not receive full value or compensation in return. The burden of the gift tax obligation is on the donor. 

The gift tax is distinct from the income tax, which is imposed on earnings and other sources of income. 

One of the benefits of gifting during your lifetime is that assets gifted are out of your estate for tax purposes. Appreciation, continued growth, and value of those assets are also out of your estate for estate tax purposes. This is at the federal level—there are some state-to-state tax implications. IRS Form 709 details the exceptions for calculating the tax. However, there are annual and lifetime limits to what you can gift. 

What is the annual gift tax exclusion?

The annual gift tax exclusion in the United States is the amount of money or property that an individual can give to another person without having to pay or file a gift tax return. 

In 2024, individuals can give $18,000 to any beneficiary they want each year without incurring gift tax obligations. You could walk down the street handing $18,000 to every person you see, which will not impact any estate or gift taxes at the federal level.  

However, if you were to give $18,001 to an individual, the additional $1 tips it over to the lifetime exemption amount they can gift in a lifetime or pass at their passing. This doesn’t trigger a gift tax—it simply indicates that you must file a gift tax return reporting the gift and relevant details. The amount of the gift exceeding the $18,000 annual exclusion will count against your lifetime gift and estate tax exemption.   

What is the estate and gift tax exemption?

The exemption is the total amount of money or property that an individual can transfer to others during their lifetime as gifts or at the time of their death without incurring any federal or estate tax. 

In 2024, an individual can gift up to a lifetime exemption of $13.61 million. The exemption is calculated per person, so a married couple has double that. Gifting between spouses is unlimited and usually doesn’t require a gift tax return.   

Think about it as one bucket of funds during lifetime gifting or applied at death. It’s not one bucket for gifting during a lifetime and another for passing additional assets upon death.   

Expected changes to exclusion amounts in 2026

These numbers are historically high and were implemented during the Trump administration. Unless additional legislative action is taken, these numbers are set to sunset at the end of 2025. On January 1st, 2026, we anticipate the exemption decreasing by about fifty percent from $13.61 million to $5 million – $6 million, indexed for inflation per person.  

Essential strategies to optimize your gifting

  • Utilize the Annual Exclusion: Use the annual exclusion by gifting up to $18,000 per recipient annually. This lets you transfer assets to multiple individuals without dipping into your lifetime exclusion. 
  • Gifting Between Spouses: Gifts between spouses are unlimited and do not require a gift tax return. Utilize this benefit to transfer assets freely within your marriage. 
  • Plan for the Future: If you anticipate gifting beyond the annual exclusion, consider the implications of your lifetime exemption and future estate tax liabilities. 
  • Professional Guidance: Consult with an estate planning professional to ensure your gifting strategy aligns with your overall financial and estate planning goals. 
  • Tracking and Reporting: If you are making gifts or starting a gifting plan, ensure your recordkeeping is up-to-date and accurate. 

Understanding annual and lifetime exemptions is crucial for anyone wishing to transfer wealth during their lifetime while minimizing tax liabilities. By leveraging the yearly exclusion, staying within the lifetime exemption, and planning strategically, you can create a legacy of financial support for your loved ones and charitable endeavors. 

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