Gift Tax 101: How to Give Tax-Free

As the year comes to a close, it’s an ideal time to blend estate planning with tax-saving strategies by leveraging the annual gift exclusion and lifetime exemption. These provisions could allow you to potentially make large gift amounts tax-free. Consequently, it’s a great opportunity to support loved ones while also reducing your taxable estate.

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December 17, 2024

Gift Tax Annual Exclusion

The annual exclusion amount is an amount you can give without tax implications. For 2024, you can give up to $18,000 per recipient. In 2025, this amount will increase to $19,000 per recipient. Further, this increase is significant because the exclusion limit remained unchanged at $15,000 from 2018 to 2021 before gradually rising with inflation. Therefore, it’s a valuable opportunity to maximize your tax-free giving as the limits increase.

Year-end deadline

The annual exclusion operates on a “use-it-or-lose-it” basis. Simply put, if you don’t take advantage of it by December 31, any unused amount doesn’t roll over to the following year. For example, if you don’t give $18,000 to your granddaughter this year, you can’t add it to next year’s $19,000 exclusion to give her a $37,000 tax-free gift in 2025. As a result, it’s essential to plan your giving before the year ends to make the most of the exclusion.

Lifetime Exemption

In addition to the annual exclusion, a lifetime exemption enables you to make larger, cumulative, tax-free gifts over your lifetime. For 2024, this exemption is $13.92 million per person. To clarify, any amount you give above the annual limit will count against this lifetime exemption, but it won’t result in immediate gift tax. Altogether, it is a valuable tool for high-net-worth individuals looking to transfer significant wealth tax-efficiently.

Tax-exempt gifts

Furthermore, certain gifts are always exempt from taxes, regardless of the amount. These include:

Donations to IRS-approved charities
Gifts to a U.S.-citizen spouse
Payments made directly for someone’s medical expenses or tuition, and
Contributions to political organizations.

Also, these transfers don’t require IRS reporting since they’re not considered taxable.

States with gift taxes

Connecticut is the only state that imposes a gift tax, which is 12%. Further, the state’s lifetime exemption matches the federal limit of $13.61 million.

Maximize tax-free gifts

Ultimately, taking advantage of the annual exclusion and the lifetime exemption is a thoughtful way to reduce your taxable estate, support your loved ones, and minimize future tax liabilities. If you have questions about your 2024 giving strategy, feel free to contact our office for guidance.

References

“Instructions for Form 709 (2023).” Internal Revenue Service, www.irs.gov/instructions/i709