With the holidays approaching, you might be considering making gifts of stock or cash to family members and other loved ones. By using the annual gift tax exclusion, those gifts — within generous limits — can reduce your taxable estate. The annual gift tax exclusion amount for 2024 is $18,000 per recipient. (It’ll increase to $19,000 per recipient beginning in 2025.)

Annual gift tax exclusion in action

Despite a common misconception, federal gift tax applies to the giver of a gift, not to the recipient. The good news is that you can structure your gifts so that they’re — at least to a limited degree — sheltered from gift tax. You can do that by taking advantage of the annual gift tax exclusion and, if necessary, the unified gift and estate tax exemption for gifts valued above the exclusion amount.

Making annual exclusion gifts is an easy way to reduce your estate tax liability. For example, let’s say that you have four adult children and eight grandchildren. In this instance, you may give each family member up to $18,000 by year end, for a total of $216,000 ($18,000 x 12).Furthermore, the annual gift tax exclusion is available to each taxpayer. So if you’re married and your spouse consents to a joint gift, also called a “split gift,” you can jointly give up to $36,000 per recipient in 2024.

Bear in mind that split gifts and large gifts trigger IRS reporting responsibilities. A gift tax return is required if you exceed the annual exclusion amount, or you give joint gifts with your spouse. Unfortunately, you can’t file a “joint” gift tax return. In other words, you and your spouse must file an individual gift tax return for the year in which you both make gifts.

Lifetime gift tax exemption

The lifetime gift tax exemption is part and parcel of the unified gift and estate tax exemption. It can shelter from tax gifts above the annual gift tax exclusion amount.

In 2024, the exemption amount is an inflation-adjusted $13.61 million. In 2025, the exemption amount increases to an inflation-adjusted $13.99 million. However, if you tap your lifetime gift tax exemption, it erodes the exemption amount available for your estate.

Tax-exempt gifts

Be aware that certain gifts are exempt from gift tax. These include gifts:

• From one spouse to the other,
• To a qualified charitable organization,
• Made directly to a healthcare provider for medical expenses, and
• Made directly to an educational institution for a student’s tuition.

For example, you might pay the tuition of a grandchild’s upcoming school year directly to the college. That gift won’t count against the annual gift tax exclusion.

The right strategy for you

The annual gift tax exclusion remains a powerful tool in your estate planning toolbox. Contact us or visit our related service page for help developing a gifting strategy that works best for your specific situation.

© 2024

This blog was updated from its original posting December 2023.