How Does the Lifetime Gift Tax Exclusion Work?

From Our “Ask a Question” Mailbag: “I want to start giving cash gifts to my children and grandchildren yearly. I know there is a Gift Tax Exclusion amount I can give away over my lifetime without paying any tax, but I am not sure how the Gift Tax works. How does the lifetime gift tax exclusion work?”

How Does the Lifetime Gift Tax Exclusion Work?

While you can make gifts tax-free by paying directly for someone’s tuition and medical treatment, you can also utilize the Gift Tax Annual Exclusion ($18,000.00 in 2024). If you make gifts exceeding the annual exclusion and do not qualify for one of the other exceptions, you start utilizing your Gift Tax Lifetime Exclusion.  

Every person gets a Lifetime Gift Tax Exclusion, adjusted yearly for inflation. The Exemption amount for 2024 is $13.61M. That is right, $13,610,000.00. You can imagine that very few people ever pay Gift Tax. Let me explain.

How the Lifetime Gift Tax Exclusion Works:

You can make as many exempt gifts as you like each year without reporting to the IRS. Further, you can “gift-split” by using your Spouse’s exemption, but then you do have to report the gift to the IRS demonstrating that your Spouse agreed. Any gift over that amount must be reported, and a portion of your Gift Tax Lifetime Exclusion must be applied.

An Example of How the Lifetime Gift Tax Exclusion Works:

Let’s say that in 2024, you pay your grandchild’s tuition directly to the school, pay for your friend’s hospital stay, give money to charity, give money to your Spouse, and give each child $36,000.00 in April. Then, you give one of your children an additional $610,000.00 gift in December to help them buy a house.

Let’s analyze each step:

• The tuition payment directly to the school is not subject to the Gift Tax.
• Paying medical expenses directly to the medical institution is not subject to the Gift Tax.
• Giving money to charity is not subject to the Gift Tax.
• Gifts to your Spouse do not trigger the Gift Tax.
• The $36,000.00. to each child is not taxable as long as your Spouse agrees to gift-split on your Gift Tax Return. This way, you make an $18,000.00 gift covered by your own 2024 Annual Exclusion and borrow your Spouse’s $18,000.00. As a team, you can thus give $36,000.00 tax-free. 
• The $610,000.00 gift doesn’t fall under any exception. So, your accountant prepares the Gift Tax Return Form 709, which shows you had $13,610,000.00 of exemption to begin 2024. It then reports the $610,000.00 Taxable Gift. This reduces your LIfetime Exemption by $610,000.00, leaving you with $13,000,000.00 of exemption.

You can now see that during 2024, you will only pay Gift Tax if you have made Taxable Gifts that exceed $13,61M. With such a high number, few people ever pay the Federal Gift Tax.

Stay tuned! The exemption amount could always go down. In fact, at the end of 2025, the exemption amount will drop to around $6,000,000.00 under current law. This significantly reduced the exemption amount but still means very few people will ever make taxable gifts exceeding $6,000,000.00.

In Conclusion, How Does the Lifetime Gift Tax Exclusion Work?

I hope you found this short article answering the question: How Does the Lifetime 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 and New Jersey Estate Planning Attorneys help walk you through what can be a confusing process. Feel free to contact our office for a free consultation. 

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Tags: Gift Tax