What to Know About 2025 Gift Tax Updates
Federal law imposes estate tax and gift tax on most transfers of money or property while a person is living and after death, with certain limited exceptions, including spousal transfers. Fortunately, the laws also provide a lifetime federal estate and gift tax exemption for every individual. In addition, a gift tax exclusion is applied on an annual basis, with a specific limit established annually by the Internal Revenue Service. Understanding the federal estate and gift tax exemption and the gift tax exclusion is important for anyone who may be affected by them.
Gift Tax Exclusion for 2025
The Internal Revenue Service sets the annual federal estate and gift tax exemption under the 2017 Tax Cuts and Jobs Act, which became effective in 2018. For 2025, the federal estate and gift tax exemption is set at $13.99 million per person, or $27.98 for a married couple.
The IRS also separately sets the annual gift tax exclusion. For 2025, the federal gift tax exclusion for 2025 is $19,000 per recipient, an increase over the 2024 to account for inflation. The gift tax exclusion is separate from the lifetime exemption, but making gifts in excess of the exclusion can affect the lifetime exemption.
It is extremely important to note that sunset (expiration) of provisions in the 2017 Tax Cuts and Jobs Act at the end of 2025 mean that the lifetime exemption will decrease to the pre-2018 levels (estimated at about less than half of current levels) unless Congress acts to extend the current level of the lifetime exemption. If that reduction occurs, it will significantly impact estate tax liability for some estates, as well as some gifting plans. Our blog post, Does Sunset of the Current Federal Estate and Gift Tax Exemption Affect Your Estate Plan? addresses this possibility in detail.
How the Gift Tax and Gift Tax Exclusion Work
The gift tax exclusion is a per recipient amount, which means that an individual may gift money or property to another person with a value up to $19,000 annually without incurring gift tax. For married spouses, the amount doubles to $38,000. There is no limit on how many gifts a person can make in a specific year. For example, a married couple could make gifts of $38,000 to each child and grandchild in any given year, and those gifts would not be subject to the gift tax. A gift tax return is not required, as long as gifts do not exceed the annual exclusion amount for each recipient.
If an annual gift to a specific recipient exceeds the exclusion amount, the tax is not automatically triggered. Instead, the excess (difference) is subtracted from the person’s (donor’s) lifetime estate and gift tax exemption (which applies both to gifts during life and property left to heirs after death) and no taxes are owed. Unless a gift qualifies as one of the limited exemptions, gifts over the annual exclusion amount may require filing a gift tax return, even if no tax is owed. If you make gifts, consulting with a knowledgeable accountant and financial adviser is essential.
Generally, a donor only needs to pay gift tax when the lifetime exemption is exhausted by gifts made during their lifetime. At that point, gift tax is owed for any amount over the annual exclusion amount. The gift tax rate is a marginal rate (based on the amount of the gift) between 18% and 40%.
Annual Gift Planning
Especially in light of the possible upcoming changes in federal law affecting the federal estate and gift tax exemption, individuals who wish to make gifts should consult with an estate planning attorney concerning gifts for 2025 at the earliest convenient time. The potential decrease in the overall tax exemption could have a significant effect on the future taxability of gifts.
Optimizing your estate and gifting plan for taxes may require making changes to accommodate upcoming changes to federal tax law. There are tools and strategies that can make certain your assets are passed on efficiently with minimum taxation, but implementing the suitable strategies may require time and taking specific action before the end of the year. The best way to find out how your estate, estate plan, and gifting plan may be affected is to schedule an appointment with your estate planning attorney now.
Talk With a Georgia Estate Planning Attorney
In our Cartersville estate planning practice at Asset Protection & Elder Law of Georgia, we help clients with all aspects of creating and maintaining an estate plan. We are fully prepared to work with clients in anticipation of the potential changes in the federal estate and gift tax due to sunset of the 2017 exemption increase provisions.
We provide legal services to clients throughout the communities northwest of Atlanta, including in Bartow County, Cobb County, Cherokee County, Gordon County, Floyd County, and Paulding County. Call us at (770) 382-0984 or contact us through our online form.
