If you’re planning to give your children a financial head start or support a charitable cause that you’re passionate about, you will need to keep the annual exclusion for gift taxes in mind. This is the amount of money or property that an individual can give away to another person or entity within a single year without triggering federal gift tax liabilities. For 2024, the Internal Revenue Service (IRS) has set the annual exclusion for gift taxes at $18,000 per gifter, meaning you can give up to $18,000 to as many people as you like and avoid paying gift taxes. If you need help optimizing your gifting strategy, consider connecting with a financial advisor.
What Is the Gift Tax?
A gift is the transfer of property from one individual to another, with the donor receiving nothing or less than full value in return. However, the gift tax doesn’t apply to all gifts – only to ones that exceed both the annual exclusion and the lifetime limit on tax-free gifts. It’s also only paid by the person giving the gift, never the person recipient.
The gift tax, which can range from 18% to 40%, is levied regardless of the donor’s intent for the transfer to be considered a gift or not. This tax mechanism is primarily designed to prevent the circumvention of estate tax that could occur if individuals dispersed their assets during their lifetime.
How does it do this? First, by setting an annual exclusion limit that determines tax-free gift amounts. Then, by imposing a tax on amounts above this threshold, thereby preventing large, untaxed wealth transfers before death. Finally, the gift tax plays a crucial role in preserving the integrity of the federal income tax system by sealing potential gaps that could be exploited through the transfer of income-producing assets.
How the Annual Exclusion for Gift Taxes Work
The annual exclusion for gift taxes is a provision in the United States federal tax code that enables individuals to give away assets to another person each year without triggering gift tax. This mechanism serves as a strategic tool for estate planning, allowing taxpayers to gradually reduce the size of their taxable estate while they are still alive.
To put it simply, the annual exclusion is the dollar amount that you can give to each person every year without having to pay any gift taxes or report the gift. The IRS adjusts the annual exclusion amount periodically to keep pace with inflation. This ensures that the provision maintains its effectiveness as living costs rise.
Here’s a look at how the annual exclusion has changed in recent years:
| Year of Gift | Annual Exclusion (per gift per recipient) |
|---|---|
| 2014 | $14,000 |
| 2015 | $14,000 |
| 2016 | $14,000 |
| 2017 | $14,000 |
| 2018 | $15,000 |
| 2019 | $15,000 |
| 2020 | $15,000 |
| 2021 | $15,000 |
| 2022 | $16,000 |
| 2023 | $17,000 |
| 2024 | $18,000 |
Annual Exclusion vs. Lifetime Exemption
While annual exclusion refers to the amount of money that a single person can give to another during one year without triggering the gift tax, the lifetime exemption is the total value you can give over your lifetime, above and beyond what the annual exclusion covers, before triggering federal gift or estate taxes. The lifetime gift and estate tax exemption is worth $13.61 million in 2024.
These two provisions are separate but work together to offer flexibility in managing estate planning. If an individual gives a gift that exceeds the annual exclusion limit to one person within a year, the excess must be reported, and it will count towards the giver’s lifetime exemption. No immediate tax is due as long as the giver’s lifetime exemption limit hasn’t been reached. However, exceeding the annual exclusion impacts the lifetime exemption, potentially triggering the gift tax eventually.
To illustrate the interplay between these two concepts, let’s consider a hypothetical case study. Suppose you have three children and decide to give each of them $20,000 in 2024. The first $18,000 given to each child falls within the annual exclusion and therefore does not reduce your lifetime exemption. The remaining $2,000 per child, however, would count toward your lifetime exemption after you file Form 709 with the IRS. As a result, the three gifts would reduce your lifetime exemption from $13.61 million to $13.604 million.
You should note that if you are married, and both you and your spouse are making a gift to each child, the annual exclusion would go up to $36,000 ($18,000 for each spouse).
Gift Tax Rates
Keep in mind that the gift tax is only paid when a person uses up their entire lifetime exemption limit, which is worth $13.61 million in 2024. At that point, they’ll pay a tax that can range from 18% to 40% on gifts that exceed the lifetime gifting limit.
Federal Gift Tax Rates
| Taxable Amount Exceeding Lifetime Exemption Limit | Gift Tax Rate |
|---|---|
| $0 – $10,000 | 18% |
| $10,000 – $20,000 | 20% |
| $20,000 – $40,000 | 22% |
| $40,000 – $60,000 | 24% |
| $60,000 – $80,000 | 26% |
| $80,000 – $100,000 | 28% |
| $100,000 – $150,000 | 30% |
| $150,000 – $250,000 | 32% |
| $250,000 – $500,000 | 34% |
| $500,000 – $750,000 | 37% |
| $750,000 – $1,000,000 | 39% |
| $1,000,000+ | 40% |
Gift Tax vs. Estate Tax
When comparing the gift tax and estate tax, it’s helpful to think of the two federal taxes as different sides of the same coin. While the gift tax applies to transfers made during a person’s life, the estate tax applies after an individual’s death and is based on the total value of their estate, including all assets and liabilities.
In fact, both taxes are connected by the lifetime exemption. In other words, gifts that exceed the annual exclusion and erode a person’s lifetime exemption, ultimately reduce the amount that can be left to beneficiaries tax-free when a person dies.
Estate tax rates are identical to gift tax rates, starting at 18% and topping out at 40% on estates that exceed the lifetime exemption by $1 million or more. For a complete breakdown, consult the federal gift tax rate table above.
Coming Changes to Keep in Mind?
The year 2026 stands out as a pivotal point for taxpayers due to the sunset provisions of the Tax Cuts and Jobs Act (TCJA). For those unfamiliar with the term, “sunset provisions” refer to laws or regulations that remain in effect only until a specific date, after which they expire or revert to previous standards unless further legislative action is taken.
This comprehensive legislation, enacted in 2017, introduced sweeping changes to the tax code with significant implications for both individual and corporate taxpayers. In terms of estate planning, the TCJA considerably increased the lifetime gift and estate tax exemption, allowing individuals to transfer a much larger amount of wealth without incurring federal estate or gift taxes. Specifically, the exemption rose from $5.49 million in 2017 to $11.18 million in 2018.
However, these provisions are not designed to last indefinitely. They are set to expire after 2025, if they are not extended. At that point, the lifetime exemption will revert to the pre-TCJA levels, adjusted upward for inflation. That means the exemption could fall to $7.5 million per person, according to Fidelity.
The anticipated decrease in the exemption amount will restrict the capacity for tax-exempt wealth transfers beyond the annual exclusion limit. As a result, gifts that exceed the annual exclusion will drain the lifetime exemption limit faster than they have under the TCJA provisions.
Bottom Line
The annual exclusion for gift taxes is a key aspect of tax planning and estate management. In 2024, the annual exclusion stands at $18,000. As the IRS periodically adjusts this amount in response to inflation, it remains a relevant and valuable component of financial legacy planning. With the expected sunset of the Tax Cuts and Jobs Act provisions in 2026, it is imperative for individuals to stay informed and possibly reevaluate their estate plans in anticipation of the changes.
Tax Planning Tips
- The gift and estate taxes aren’t the only federal levies that you can plan for and potentially mitigate. Capital gains should also be accounted for, and harvesting investment losses can help you reduce your capital gains tax liability.
- A financial planner may be able to help you build a strategy to limit your tax liability. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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