Gift Tax Limits and Gifts That Are Tax-Exempt
How Many Lifetime Gifts Can You Give Without Incurring a Gift Tax?
Your lifetime gifts can cost you tax dollars. You can pay the gift tax while you're alive, or your estate will have to pay an estate when you die, at least if you give away over certain monetary limits. The Internal Revenue Service is waiting to collect one way or the other, but the IRS does seem to approve of generosity. It allows for a very sizable lifetime exemption from gift taxes, and for an annual exclusion as well.
The Lifetime Exemption Changes Annually
The lifetime exemption is the amount an individual can gift away over the course of their lifetime without incurring a federal gift tax—with a catch. The federal gift tax shares this exemption with the federal estate tax.
This lifetime exemption was only $1 million in 2010, with a top tax rate of 35%. It increased to $5 million and the top tax rate remained at 35% in 2011, then it went up again to $5.12 million in 2012 with the rate remaining the same.
The lifetime exemption increased to $5.25 million in 2013 under the provisions of the American Taxpayer Relief Act (ATRA), and the tax rate increased to 40%. ATRA kept the gift tax in place, but it indexed the lifetime exclusion for inflation, so it continues to increase annually. The exemption increased to $5.49 million by 2017, with the top tax rate still set at 40%.
Then came the Tax Cuts and Jobs Act (TCJA). This effectively doubled the exemption beginning in 2018, plus the annual inflation adjustments. The exemption reached $11.70 million in 2021, including inflation adjustments.
The TCJA expires at the end of 2025, so it's possible that the exemption will plummet back to the $5-million level at that time unless Congress takes steps to renew the legislation. But the IRS issued a statement in November 2018 indicating that taxpayers who make gifts from 2018 through 2025 will not be adversely affected if the TCJA does indeed expire.
It's a Unified Tax Credit
The gift tax and estate taxes are linked in the tax system, so the gift tax shares its lifetime exemption with the estate tax exemption under a provision known as the Unified Tax Credit.
The government doesn't want you to give too much away for free, either while you're alive or after your death. The Unified Tax Credit prevents taxpayers from giving away all their property during their lifetimes to avoid estate taxes when they die.
Each time you tap into the lifetime gift tax exemption, it reduces the estate tax exemption available to your estate under the Unified Credit. At $11.70 million as of 2021, only $700,000 would remain to shelter your estate from taxation if you gave away $11 million of your largess during your lifetime.
The Annual Gift Tax Exclusion
The Internal Revenue Code provides for annual exclusions as well—values that you can give away per person per year without incurring a gift tax. These "annual exclusion gifts" don't use up any of your lifetime exemptions unless you go over them, and then only the balance over your annual exclusion would subtract from your Unified Credit unless you elect to pay the tax in the year it's incurred.
This annual exclusion is also indexed for inflation. It increases periodically to keep pace with the economy, but it can only increase in $1,000 increments, so it doesn't happen every year. You can gift up to $15,000 per person in 2021 without incurring a federal gift tax. Married couples can combine their exclusions and gift up to $30,000 to the same person per year as of 2021.
These "split gifts" must still be reported to the IRS on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
Gifts Made to Spouses
Gifts made to your spouse are entirely exempt from gift taxes because of the unlimited marital deduction, but this rule only applies if your spouse is a U.S. citizen. Otherwise, gifts to noncitizen spouses are exempt up to the first $159,000 annually as of 2021. Only the balance in value over this amount per year is subject to the tax.
Other Tax-Free Gifts
The IRS provides a few other options for tax-free gifts as well. You can pay someone else's tuition or medical expenses for them with no limit, provided that you pay the learning institution or care provider directly. You can also give unlimited gifts to charities and political organizations without incurring a gift tax.