During this holiday season, are you feeling particularly generous? If you are considering giving significant gifts and are worried about paying gift taxes, there’s no need to fret. Most people are not required to pay gift taxes due to the numerous exceptions in the lifetime gift tax rules.
By 2025, the individual exemption for lifetime gift taxes will increase to $13.99 million, and for married couples filing jointly, the exemption will rise to $27.98 million.
In 2024, the individual lifetime gift tax limit was $13.61 million, and for married couples, it was $27.22 million.
However, 2025 may be a critical year for gift tax laws. The high levels of lifetime gift tax exemptions are attributed to the Tax Cuts and Jobs Act (TCJA), a significant tax reform signed into law during the first term of President Donald Trump in 2017.
Key provisions of the TCJA, including the lifetime gift tax exemption, are set to expire at the end of 2025. This would reduce the lifetime exemption to pre-2017 levels, estimated to be $7 million.
Nevertheless, there is a possibility of an extension of this provision under President Trump’s second term and a Republican-controlled Congress. However, given the high deficits, some Republicans may opt to avoid extending significant tax cuts.
Regardless of the outcome, understanding gift taxes is crucial for tax planning and estate management. So, let’s delve into the details.
Gift tax is a federal tax paid on money, property, or assets transferred to another person without expecting anything in return. Typically, the recipient is the one responsible for paying the applicable gift tax.
However, due to the annual gift tax exemption, most people do not need to pay gift taxes or even report them to the IRS.
The annual gift tax exclusion refers to the value of gifts that you can transfer to others without needing to report it to the IRS.
By 2025, the annual gift tax exclusion will rise to $19,000 per person. This means you can gift $19,000 to each of your siblings, uncles, or friends without filing a gift tax return.
For married couples, the exclusion will increase to $38,000. Therefore, a couple can collectively gift $38,000 to family or friends without Uncle Sam’s involvement.
In 2024, the annual gift tax exemption was $18,000 for individuals and $36,000 for married couples.
If you exceed the annual gift tax exemption, you typically just need to report the gifts on IRS Form 709 without having to pay gift taxes, thanks to the lifetime gift tax exemption.
Some financial advisors suggest viewing the lifetime gift tax exemption as a large bucket and the annual gift tax exemption as a small bucket.
When you surpass the annual gift tax exemption or fill up that small bucket, the excess amount spills over into the lifetime gift tax exemption pool.
So, if you gift your brother $25,000 by 2025, the extra $6,000 ($25,000 minus $19,000) falls under your lifetime gift tax exemption.
Once that bucket is filled, you need to start considering paying gift taxes.
Individuals typically pay gift taxes on amounts exceeding the lifetime gift tax exemption, which is $13.99 million in 2025.
The excess amount is taxed at rates ranging from 18% to 40%.
Here are the tax rate details:
There are ways to shield yourself from the impact of gift taxes. For example, you can spread the gift amount over several years. Say in 2025, you want to give your brother $25,000. But the annual gift tax exemption is $19,000. You can give him $19,000 in 2025 and the remaining $6,000 in 2026. This helps you stay within the annual tax-free limit and prevents excess amounts from flowing into your lifetime gift tax exemption.
Remember, the annual gift tax exemption is adjusted for inflation.
Additionally, you can share gifts with your spouse. In 2025, the annual gift tax exemption for married couples is $38,000. If you wish to give your daughter $20,000, it would exceed your individual $19,000 exemption. However, both you and your spouse can gift $10,000 each to your daughter, totaling $20,000, without surpassing the $38,000 joint gift tax exclusion for married couples. This is known as “gift splitting.” In this case, both spouses must file federal gift tax returns. Gift splitting can get complex and may not always be the best financial choice for all couples. Consulting a tax advisor before proceeding with this strategy is advisable.
Nevertheless, there are other ways to shield funds from gift taxes. For instance, money sent directly on behalf of others to educational institutions does not incur gift taxes.
This means if you want to contribute $30,000 for your son’s college tuition, sending it directly to the school avoids gift taxes. Avoid sending it directly to your son since the IRS could consider it a gift exceeding your personal exemption.
Similar situations exist for medical expenses. If you directly transfer funds to medical institutions or insurance companies to cover someone’s medical bills, it is not subject to gift taxes.
In conclusion, it is important to remember that the current lifetime gift tax exemptions may see significant updates or reductions after 2025. Consulting qualified tax and estate planning advisors when preparing your gifts is always a wise idea.