Your Guide to Gift Taxes and Exemptions
Gift-giving is more than a heartfelt gesture—it’s also a savvy financial strategy. Whether your generosity is fueled by love or a desire to minimize Uncle Sam’s cut, understanding gift tax and exemptions can help you make the most of your giving. This article unpacks the essentials: what constitutes a gift, how it reduces taxes, annual and lifetime exclusions, and common mistakes to avoid. Plus, discover how thoughtful gifting can benefit both your loved ones and your estate planning goals.
Whether you’ve been naughty, nice, or somewhere in between, some recipients might find more than a full stocking this gift-giving season. Now is the perfect time to unwrap the finer points of gift tax and exemptions.
- What is a gift?
- How does a gift reduce potential taxes?
- Why are gifts taxed?
- What is the annual gift tax exclusion?
- What is the estate and gift tax exclusion?
- What are common gift-giving mistakes to avoid?
How does a gift reduce tax?
Are gifts given out of love? Sure. But just that? Well… Gifting isn’t just about love; it’s also a way to keep Uncle Sam from swiping a bigger slice of the pie.
How? Gifting reduces your estate’s value, so your beneficiaries don’t pay hefty taxes on it once you pass.
What is a gift and why is it taxed?
In the tax world, a ‘gift’ is something – money, property, assets – given with no pay-back strings attached, intended to reduce one’s estate value.
Much like your folks giving a present to your younger sibling on your birthday to keep the peace, the gift tax is the federal government’s way of ensuring gift-givers don’t sidestep tax obligations.
What is the annual gift tax exclusion?
See, give, and you shall receive. The annual gift tax exclusion allows you to give a certain amount each year without filing a gift return with the IRS. In 2024, that exclusion amount is $18,000. It will increase to $19,000 in 2025 – its highest amount on record.
If you’re a married couple attached to the same estate, using the 2024 exclusion as an example, you can each gift $18,000, allowing you to reduce the estate’s value by $36,000 for each individual you gift to. And there’s no limit to the number of individuals. If you tip over the $18,000 (or $36,000) per individual, that’s when you can expect the IRS to stick out their hand.
What is the estate and gift tax total exemption?
Not so fast, we know what you’re thinking: why not gift $36,000 to all your loved ones to avoid gift taxes? Well, there’s a cap on the total amount of money, property, or assets an individual can gift to others during their lifetime without incurring tax.
In 2024, an individual can gift $13.61 million, double that for a married couple.
Will the estate and gift tax exemption change in 2026?
These numbers, which were implemented in Trump’s previous term, ‘sunset’ at the end of 2025. So, unless legislation says otherwise, the $13.61 million exemption per individual is expected to drop by about half, down to approximately $6 million.
What about gifting to spouses?
Don’t worry; all of those years putting up with snoring and dirty clothes left on the floor will pay off with tax-free gifting between spouses, with something called the ‘unlimited marital deduction’. This means that when one spouse passes away they can gift the assets to their spouse and avoid estate taxes.
What are some common gift-giving mistakes to avoid?
- Think bigger: Consider options that grow in value over time, not just cash.
- Considering the 529?: That’s great, but remember it limits recipients to college funds, unlike other options that support entrepreneurship or other goals.
- Should you really give a child free rein of $18,000 in gifts each year?: 11-year-old North West recently gave her mom, Kim Kardashian, a lavish five-figure diamond necklace engraved with ‘Skibidi Toilet’ (blame TikTok). We rest our case.
Our Stream Protection Plan can help with all of the above. How? We’re glad you asked.
Why the Stream Protection Plan is the perfect gift
Funding a Stream Protection Plan through gifting reduces your estate’s value, helping loved ones avoid hefty taxes and setting them up for even greater wealth. Plus, it provides them with a tax-free savings and retirement strategy with market-loss protection and living/death benefit. It’s the gift that truly keeps on giving.
Make a gift-giving list and check it twice
✓ Mark in your calendar to use up the annual gift tax exclusion every year.
✓ Consult with wealth-transfer professionals, particularly if you plan to gift beyond the annual exclusion.
✓ Keep track and document your gifting.
✓ Gift to your spouse.
✓ Stay informed on post-election changes.
