The gift tax exclusion will likely drop in 2026. Estate planners will want to take note this year.
With the holidays just around the corner, many people will give the gift that never goes out of style: cash. Those who are considering being especially generous will want to review the federal gift tax rules for 2024.
The federal gift tax can range from 18% all the way up to 40%. But most Americans will never end up owing it. That’s because the penalty only kicks in once you’ve given away a lifetime total of $13.61 million.
In 2024, at least. That number has been rising since 2018, thanks to the Tax Cuts and Jobs Act of 2017. However, it’s scheduled to drop back to pre-2018 levels in 2026 unless Congress acts sooner—meaning that in just over a year, gift givers will likely be subject to a lifetime tax exclusion of $7 million, about half the current limit.
For now, it’s a good idea to know the rules about what constitutes a gift, which gifts the IRS wants to know about, and how high-net-worth individuals and couples might want to take advantage of the higher exclusion limit while it lasts.
What Constitutes a Gift?
The IRS defines a gift as any transfer from one individual to another where the giver does not receive full compensation in return. So, federal gift tax applies to:
- Cash
- Stock transfers
- Real estate
- Vehicles and other property
- Insurance policy benefits
- Forgiven debts
Gifters won’t pay federal tax on:
- School tuition, when paid directly to the school
- Medical expenses, when paid directly to the provider
- Charitable donations
- Gifts to spouses
A major advantage of the gift tax exclusion is that it allows family members to transfer wealth to the next generation, reducing the size of their estate without incurring taxes on the transfer.
Annual and Lifetime Limits
The annual gift tax limit, also known as the gift tax exclusion, determines how much one individual can give to another in one year without having to file IRS Form 709 to report the gift. In 2024, the gift tax exclusion is up to $18,000, from $17,000 in 2023. For a married couple, that number doubles to $36,000.
The tax exclusion applies to single gifts to individuals. So, a married couple could give $36,000 to each of their 5 grandkids in a single year without having to report the gifts.
But, once a single gift exceeds that annual tax limit, the amount above the limit starts to count toward the lifetime gift tax exclusion. That’s where the $13.61 million number comes in. Once a person exceeds that lifetime limit, additional gifts get taxed. The rate then depends on the size of the gift: from 18% on gifts of up to $10,000, to 40% on $1 million or more.
For example, if a mother wants to contribute $50,000 toward her son’s wedding expenses, she’ll exceed the $18,000 gift tax limit and would need to use Form 709 to report $32,000 toward her lifetime gift tax exclusion. In 2024, she’d still be $13,578,000 away from paying taxes on gifts.
Looking Ahead to 2026
Most often, gift tax limits come into play with estate planning. 2025 will be a good time to consider taking action to transfer wealth to loved ones tax-free, at least for people who expect to pass on more than $7 million in assets.
There are pros and cons to giving away large amounts of cash and other assets, like real estate, to loved ones. One downside for the giver is losing access to those assets, since they must truly be given away to constitute a gift. Parents and older family members should think carefully about what they can comfortably give now.
Also consider balancing gifts to family with charitable gifts, which are subject to different tax rules. Trusts can serve as another option to pass on large gifts; trusts offer the giver more control over how the recipient uses the money.
Always consult a qualified financial planner who can help you minimize tax liability as the gift tax limits change in the next couple of years. And, rest assured that for the 2024 holidays, unless you’re giving each grandkid more than $18,000, the IRS doesn’t want to know about any gifts to your loved ones.
This article is not intended to be a substitute for professional financial advice from a qualified financial advisor.
Sources:
Blog posting provided by Society of Certified Senior Advisors
