It is very rare for an ordinary household to owe money on gifts.
The gift tax has a somewhat complicated two-tier structure. Each year you can give up to an annual amount (the “annual exclusion”) without paying, or even reporting, anything on your taxes. Then, over your lifetime, you have a significantly higher amount that you can give away in total without owing any taxes (the “lifetime exclusion”). In any given year, if you have given away your entire lifetime exclusion you owe gift taxes on any amount you give over the annual exclusion. The result is that the IRS only taxes one-to-one gifts worth $18,000 in 2024. In 2025, that will go up to $19,000. But the lifetime exclusion must also be considered, and there are ways to gift couples more.
For example, say that you’d like to give $65,000 to your daughter and her husband. In most, but not all cases, you will not owe any taxes. In some cases, you’ll have to file some extra paperwork with the IRS, despite not necessarily owing any money. Here’s what to know. You can also use this free tool to match with a financial advisor if you’re interested in personalized financial guidance.
The gift and estate tax is a joint tax applied to all unilateral transfers. This means that it can apply whenever you give someone assets without receiving something of equivalent value in exchange. In most cases, this involves three situations:
The term “peppercorn transfer,” or “peppercorn promise,” is a legal phrase. It refers to selling something in exchange for a peppercorn, meaning that you technically receive something in return, but nothing of any actual value. For example, say that you have a house assessed at $500,000, and you sell it to your friend for $10. While this would technically be a sale, rather than a gift, it would also constitute a gift to the extent of the $499,990 worth of value that you effectively gave them.
When the gift tax applies, it is assessed to the person who gives the gift, not the person who receives it. The gift tax has rates ranging from 18% to 40% of the taxable gift. However, most people will never pay the gifts and estates tax. The reason is the tax exclusions.
The gift tax has two large exclusions: the annual and the lifetime exclusions. In any given year you only pay taxes on any part of a gift that exceeds that year’s annual exclusion, and only to the extent that this gift also exceeds your remaining lifetime exclusion.
The gift tax’s annual exclusion is an amount that you can give each year to each recipient. In most cases you do not need to even report gifts under the exclusion amount on your taxes. These can simply exist as informal transfers. The only significant exception to this reporting requirement is when married couples give joint gifts that exceed one spouse’s annual exclusion.
The annual exclusion amount is adjusted upward each year in order to keep pace with inflation. In 2024, it is $18,000 and in 2025, it is $19,000.
The annual exclusion applies per-recipient, per-donor. This means that as an individual, you can give away $18,000 per person to as many people as you’d like without reporting it on your taxes. As a married couple, you can jointly give away $36,000 per person to as many people as you’d like.
The annual exclusion only applies to transfers made in the current year. This means that you can give away up to the annual exclusion each year, regardless of past giving. So, for example, say you give away $18,000 to your daughter in 2024. In 2025, you can give away $19,000 tax-free, since your giving in 2024 will not apply to your taxes in 2025.
A financial advisor can help you keep track of gift tax rules and other legislation as it changes over time.
The gift tax’s lifetime exclusion is the amount that you can give away tax-free over your entire life. It applies to your estate as well, meaning that your estate will be untaxed to the extent of your remaining lifetime exclusion.
The lifetime exclusion is cumulative. It accounts for all tax-reported gifts that you have made over your lifetime put together. It is also per-donor rather than per-recipient, meaning that it applies to all gifts you have made to all recipients in total. This is as opposed to the annual exclusion, which is a full exclusion that applies to each recipient.
When you give a gift above the annual exclusion, you report it on your taxes. The amount of your gift above the annual exclusion is then applied to your lifetime exclusion. If you give a gift above your lifetime exclusion, the overage is subject to taxation.
Unlike the annual exclusion, the lifetime exclusion does not reset or renew. This is the total amount you are allowed to give tax-free in your lifetime. That said, it is adjusted upward each year for inflation. In 2024, the lifetime exclusion is $13.61 million. In 2025, it will increase to $13.99 million. So, say that in 2024 you have given away your entire lifetime exclusion. In 2025, you would be able to gift another $38,000 due to the raised cap ($13.99 million – $13.61 million).
Or, for example, say that in 2024 you give three people $20,000 each. For each of these recipients, the first $18,000 would fall within the annual exclusion and would not trigger any tax event. The remaining $2,000 per person would be over the annual exclusion. This would cumulatively apply to your lifetime exclusion, reducing it by $6,000. You would pay no money on these gifts, and your lifetime exclusion might go down from $13.61 million to $13,604,000. Then, in 2025, it would be adjusted upward to $13,984,000 (the 2025 lifetime exclusion of $13.99 million – your lifetime giving of $6,000).
Like the annual exclusion, the lifetime exclusion applies per-person in the household. This means if you are married, you have a combined lifetime exclusion of $27.22 million in 2024. However, be aware that the potential sunsetting of the Tax Cuts and Jobs Act may significantly reduce the lifetime annual exclusion as soon as 2026.
As explained by Arron Bennett, CFO and Tax Strategist for Bennett Financials, in our case here you’re on solid ground. You and your partner can actually make this gift entirely tax free.
Since the 2024 gift exclusion allows you to give up to $18,000 per recipient, he said, “you can gift $18,000 to your daughter and $18,000 to her spouse without any tax implications. If you are married, your spouse can also gift $18,000 to each recipient, doubling the exclusion to $72,000 total. For a $65,000 gift… if you are married, you and your spouse can ‘split’ the gift, giving $18,000 each to your daughter and $18,000 each to your husband, for a total of $72,000.”
In other words, Bennett said, “if you’re married, you can give the $65,000 gift entirely tax-free.”
But he cautioned that gift taxes can be complicated. Consulting a financial planner is generally the best way to help ensure compliance.
Now, gift-splitting does raise one issue. Since your household will have given more than the annual exclusion, you will need to report this gift on your taxes using Form 709. Otherwise, as long as you and your spouse give this gift together, it won’t even affect your lifetime exclusion. You can give $18,000 (or $19,000 in 2025) to your daughter and her husband each individually. Then your spouse can do the same.
If you are giving this gift alone, it’s a somewhat different story. In that case, you have an annual exclusion of $18,000 per person, so you could give your daughter and her husband $36,000. Then, you would need to choose between either giving the rest of the $65,000 this year and reducing your lifetime exclusion by $29,000 (the overage) or waiting until your annual exclusion resets next year and making the same gift again. Consider speaking with a financial advisor if you need assistance navigating rules and paperwork.
The gift tax is a tax assessed on all unilateral transfers, or any sale of assets significantly below market value. However, it also comes with extremely high exclusions, allowing you to give away more than $13 million before you ever have to worry about it.
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Very few households will ever have to worry about the gift tax or the estate tax. These are taxes that apply only to wealthy households with tens of millions of dollars in assets to transfer. But, if that does apply to you, it’s never too early to start considering how to minimize those taxes in your will.
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