Annual Gift Exclusion

The annual gift exclusion is a provision in U.S. federal tax law that allows individuals to gift a certain amount of money or property to another person each year without incurring gift tax consequences.

The annual gift exclusion is primarily designed to facilitate the transfer of wealth between generations while minimizing tax liability.

This exclusion serves as a crucial tool in estate planning and wealth transfer strategies, enabling individuals to reduce the size of their taxable estate over time by making tax-free gifts during their lifetime.

The annual gift exclusion amount is subject to periodic adjustments by the IRS to account for inflation and changes in tax laws. The gift exclusion amount in 2023 is $17,000 per recipient, raised from $15,000 in previous years.

The annual gift exclusion is a crucial component of tax planning, allowing individuals to transfer wealth without incurring additional tax liabilities. It is particularly beneficial for estate planning purposes, enabling wealth to be distributed to heirs without diminishing the estate's value through taxation. 

The exclusion applies to cash gifts and the fair market value of gifted property, and it is per recipient, meaning an individual can give to multiple recipients, each benefiting from the exclusion.

The gift amount changes from year to year and is determined by the IRS.

• In 2018 and 2019, the annual gift exclusion amount was $15,000 per recipient.
• In 2020 and 2021, it remained at $15,000.
• During 2022, the annual gift exclusion was adjusted to $16,000 per recipient.
• In 2023, the amount is $17,000 per recipient. 
• For 2024, the annual gift exclusion amount has been adjusted to $18,000 per recipient— the highest exclusion amount ever.

Since the amounts are subject to IRS adjustments and are typically announced towards the end of the preceding year, the 2025 gift exclusion amounts are not yet known.

The annual gift exclusion is separate from the lifetime gift tax exemption, which is a cumulative amount an individual can give over their lifetime without incurring federal gift tax. Amounts given above the annual exclusion in a given year count against this lifetime exemption. 

The application of the annual gift exclusion is not limited to family members; it can be utilized for gifts to friends, employees, or any other individuals. However, gifts to spouses who are U.S. citizens are generally exempt from the gift tax, regardless of the amount. Additionally, payments made directly to educational institutions for tuition or to medical providers for medical expenses are not considered taxable gifts and do not count towards the annual exclusion or the lifetime exemption.

One of the primary objectives of the annual gift exclusion is to reduce the taxable estate of the donor over time. By making regular use of this exclusion, individuals can gradually transfer assets to their heirs and loved ones while minimizing potential estate tax liabilities upon their passing. It is important to note that while the gift itself is tax-free under the exclusion, any income generated by the gifted property may still be subject to income tax.

Patrick, a wealthy individual, wants to financially assist his children and grandchildren while minimizing potential estate taxes. In 2024, he decides to take advantage of the annual gift exclusion of $18,000 per recipient.

Patrick gifts $18,000 each to his three children, two grandchildren, and a close friend, totaling $108,000 in gifts for the year. Because each gift falls within the annual gift exclusion limit, he does not incur any gift tax liability for these transfers.

Over several years, Patrick continues to make similar annual gifts to his family members, effectively reducing the size of his taxable estate. By doing so, he ensures that his heirs receive financial support and inheritances without the burden of substantial estate taxes when he passes away.