How Does the Annual Gift Tax Exclusion Work?

From Our “Ask a Question” Mailbag: “I would like to give my children a cash gift this year, but I hear it might be subject to Gift Tax. Is that true? How does the annual Gift Tax exclusion work?”

Estate Planning Team Member Anna Charlebois

What is Annual Gift Tax Exclusion?

In short, the annual gift tax exemption is an amount you can give to each person annually without telling the IRS or reducing your overall gift tax exemption. 

Congress created the Gift Tax to prevent the super-wealthy from giving away assets during their lives to avoid the Estate Tax at their deaths. In short, you are given an exemption ($13.61 Million in 2024), which you can leave tax-free at death or give away during your lifetime. If the value of what you give away during your lifetime plus the value of what you have at death exceeds $13.61M, then you pay the tax.  If you give more than $13.61M away during your lifetime, you pay Gift Tax, and if you die and the formula exceeds $13.61M, then your estate pays Estate Tax.

But, during your lifetime, not every gift reduces your exemption.  Congress recognized that some gifts are just nice and should not be counted. For example, paying someone’s tuition directly to the school does not reduce your exemption. Another example is paying someone’s medical bills. These are nice gifts, and Congress didn’t want to discourage you from making them. Furthermore, congress decided that each year, you can give a person a certain amount of money to be used for any purpose, which is too small to bother reporting. This is the “Annual Gift Tax Exclusion.” This way, you can give your kids birthday gifts or help them with a car payment and not trigger the need to file a Gift Tax Return.

What is the Annual Exclusion for 2024?

In 2023 the, the exemption was $17,000.00. For 2024, the threshold has been raised to $18,000.00.

How Does the Annual Gift Tax Exclusion Work?

If a gift to someone in 2024 is $18,000.00 or less, you do not need to file a Federal Gift Tax Return. Just write a check, accept the person’s thanks, and you are done.  

But this is $18,000.00 for the whole year. Did you give your friend $18,000.00 in January and then buy him a cup of coffee for $5.00 in February? If so, you should have a Gift Tax Return declaring the $5.00.  You have now given one person over $18,000.00, exceeding your Annual Exemption for that person.   Remember, the $18,000.00 Annual Exclusion is meant to cover things like buying people presents.  So if you give a lump sum gift of the entire amount, you have no more wiggle room.

Remember, this is an Annual Gift per person. So, in 2024, you can give $18,000.00 to your daughter, $18,000.00 to her husband, and $18,000.00 to each grandchild. Then, in January 2025, start again…as it is “annual.”  Many of my clients make these gifts every January.

Can My Spouse Make the Same Gift?

Yes. Each person is entitled to make an annual gift, which is excluded from the gift tax. 

For example, if you are married, you can give your son an $18,000.00 gift in 2024. But, so can your Spouse, for a total of $36,000.00. If your Spouse doesn’t want to make a gift but doesn’t mind letting you use their exemption, they can allow you to “gift split.”  This means you give a gift of $36,000.00, but your Spouse allows you to use their exemption. While there is no tax due or reduction in your gift tax exemption, you do have to report the gift split on Form 709. Your accountant can prepare this return for you.

In Conclusion, What is the IRS Gift Tax Annual Exclusion Rate for 2024?

I hope you found this short article answering the question: How Does the Annual Gift Tax Exclusion Work? I have also included some links for more detailed information.

Contact us if you want to know more about estate planning or have questions about trusts. Let our Pennsylvania Estate Planning Lawyers help walk you through what can be a confusing process. Feel free to contact our office for a free consultation. 

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