Many of our clients ask us about the taxation of gifts they make to loved ones. This question is coming up often, now that high school and college graduations are just around the corner. Depending on your situation, we can take several approaches to manage your taxes in a way that minimizes your tax burden.
One important tax to know about is the federal gift tax. It ranges from 18 percent to 40 percent and applies to one-time gifts of cash or property that individuals make to loved ones or others throughout the year. Knowing the annual gift tax exclusion can save you money and help you avoid having to file gift tax returns.
Here is how the IRS defines the federal gift tax:
The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether or not the donor intends the transfer to be a gift. The gift tax applies to the transfer by gift of any type of property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.
As the one who is making the gift, you would typically pay the tax (if any). However, in some cases, the recipient of your gift could be responsible for the taxes. Plus, your estate would be responsible for the federal gift tax if you were to die before the taxes are paid.
Understanding the generation-skipping transfer tax (GSTT)
When you make a gift that requires you to report it, you will need to file IRS Form 709 no earlier than January 1st, but no later than April 15th, of the year after you make the gift.
You will complete Form 709 to report transfers that are subject to the federal gift, as well as certain generation-skipping transfer taxes (GSTTs) and allocation of the lifetime GSTT exemption to property you transfer to others during your lifetime.
The GSTT is another federal tax; it applies when you transfer property, by gift, inheritance or a trust, to someone (other than a spouse) who is two or more generations younger than you — more specifically, to someone other than a spouse who is at least 37½ years younger than you. In other words, it applies when you give gifts that skip a generation (your own children) to transfer assets to your grandchildren or great-grandchildren.
This tax was introduced in 1976 to keep people (typically the wealthy) from transferring assets to their grandchildren without paying federal estate taxes, which they would have to do if they made those same gifts to their children. The GSTT closed the loophole that made it possible for someone’s inheritance to skip a generation to avoid double estate taxation.
The provisions relating to the GSTT exemption in the current tax law are scheduled to “sunset” at the end of 2025. This means that as of January 1, 2026, the GSTT exemption will revert back to the amount that was allowed under the law that was effective in 2017 (an inflation-adjusted $5 million, or about half of what is currently allowed).
So if you are thinking about taking advantage of the higher current exemption amounts, there is limited time to do so, unless Congress acts to change the law again.
The gift tax exclusions for 2024 and 2025
Most Americans will never have to worry about paying this tax. That’s because the IRS allows you to give away a specific amount of assets or property each year tax-free.
For 2025, the annual gift tax exclusion is $19,000, up from $18,000 in 2024. This means you can give up to $19,000 to as many people as you want without having to pay any taxes on the gifts. For example, you could give $19,000 to each of your grandchildren in 2025 without triggering the gift tax. For married couples, each spouse may give away $19,000 tax-free in 2025. This would allow each spouse to combine their $19,000 limit to give up to a total of $38,000 to each of their gift recipients in 2025.
However, if your gift exceeds the $19,000 limit for 2025, that does not automatically trigger the gift tax. For 2025, the IRS allows each individual to give away up to $13.99 million in assets or property over the course of his or her lifetime and/or as part of his or her estate. If your gift exceeds the annual exclusion limit, the difference is simply subtracted from your lifetime exemption limit, and you will owe no taxes.
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We realize that taxes can be confusing and seem complicated — we are here to help. As with any aspect of your finances, proper planning when gifting assets can save you money and frustration. Please get in touch with us if you are planning to make gifts to loved ones. Depending on your situation, we might be able to maximize the amount you transfer, and minimize the taxes you pay, by taking advantage of certain exemptions.
