Annual Gift Tax Exclusion 2024 – A Comprehensive Guide

Expiration and Potential Changes

It is important to know that the higher federal gift and estate tax deduction amounts will end on December 31, 2025, as planned by the Tax Cuts and Jobs Act of 2017. If nothing changes in the law, these provisions are likely to go back to $5 million per person, based on inflation, on January 1, 2026. 

As for more changes, they might happen depending on how the 2024 elections go. So, strategic planning is very important, and people and couples should think about gifting chances while the tax breaks are at their highest.

GST Tax Exemption Increase

These changes do not affect the GST tax exemption, which will increase to $13.61 million. This change allows individuals to transfer assets up to the exemption amount to a trust throughout their lifetime and/or at death, with the allotted GST tax exemption insulating the trust from gift, estate, or GST tax upon distribution or termination.

Anticipated Changes in 2026

The higher exemption amounts are currently based on a $10 million exemption, which is adjusted every year for inflation. However, there is a good chance that this will go down a lot in the future. It is expected that the amount will go back to about $7-8 million on January 1, 2026. 

There are, however, proactive planning strategies that allow people and couples to “lock in” the higher exemption amounts before they are lowered.

Potential Sunset in 2025

The current exemption amounts were put in place in 2017, but they could go back to $5 million per person or $10 million for a married couple at the end of 2025. 

If this cut is kept up with inflation, it could mean that, as of January 1, 2026, the federal estate and gift tax exemption amount will be around $6.8 million for an individual and $13.6 million for a married pair.

Tax Planning Considerations

Strategic tax preparation becomes critical in view of these changing circumstances. Larger donations are preferable not only for tax efficiency but also for effectively navigating state estate taxes. Given the possibility of significant changes in the tax landscape, understanding the basis of given assets is critical. 

In contrast to low-basis assets, where the receiver inherits the donor’s basis, potentially resulting in higher capital gains taxes, high-basis assets or cash donations might limit capital gains upon ultimate sale.

Consultation with Trusted Advisors

Individuals and families are recommended to work with their trusted financial advisors due to the intricacy and time sensitivity of these prospective developments. They can examine the implications of 2023 gifting, look into further gifting opportunities in 2024, or plan for larger donations that take advantage of the existing higher exemption amounts. 

This collaborative effort strives to guarantee that people and families may make educated decisions that are in line with their own financial circumstances and goals.

Calculation and Examples

It is important to know how the Annual Gift Tax Exclusion is figured out if you want to make tax-efficient gifts and understand how the gift tax system works. In this part, we’ll talk about how to figure out the exclusion and give some real-life examples to show how it can be used.

• Determining Eligible Gifts

The Annual Gift Tax Exclusion is calculated by first identifying qualified gifts. A gift is defined as any transfer of money or property to another person without obtaining something of equivalent worth in return. Not all gifts, however, are liable to gift tax. Gifts that fall within the exclusion limit are tax-free and do not count toward a person’s lifetime gift tax exemption. Some common examples of tax-free gifts include: 

• Gifts that are not more than the annual exclusion for the calendar year
• Tuition or medical expenses you pay for someone
• Gifts to your spouse
• Gifts to a political organization

• Understanding the Annual Exclusion Limit

The annual exclusion limit is $17000 per recipient, as per the most recent knowledge update in January 2023. This means that in a calendar year, an individual can contribute up to $17000 to any number of recipients without incurring the gift tax. If you have three children, for example, you could give each of them $17000 for a total of $45000, and none of these donations would be subject to gift tax.

• Real-life Examples of Gift Tax Exclusion Scenarios

Scenario 1: Let’s say a parent wants to give their kid $20,000 this year. The annual exclusion limit is met by the first $17000 of the gift. The leftover $3000 would be a taxable gift. The giver needs to fill out IRS Form 709 to report this $3000 gift, but that doesn’t mean they will have to pay gift tax. The amount they give away over the exclusion limit will lower their lifetime gift tax exemption.

Scenario 2: Married couples have the option of gift splitting, allowing them to combine their individual exclusion limits. For instance, a couple with two children could collectively gift $68,000 per year (2 recipients x $17000 x 2 spouses). This can be a powerful strategy for transferring wealth efficiently.

Scenario 3: It’s important to know that the lifetime gift tax exemption is not the same thing as the yearly exclusion. The lifetime exemption is much higher at over $11 million per person, while the annual exclusion lets you give up to $17000 per recipient per year without having to pay taxes on it. This lifetime exemption is lessened by gifts that are worth more than the yearly exclusion.

By understanding these situations and the numbers that go with them, you can make smart choices about how to give gifts that are in line with IRS rules and have the least amount of tax effects possible. Remember that tax rules can change, so it’s best to talk to a tax expert or read the most recent IRS guidelines for the most up-to-date information.