The lifetime exemption from paying federal gift taxes is a dollar amount that you can give away over the course of your life without paying the tax—and yes, it's the giver, not the recipient, who must pay it. The Internal Revenue Code provides for an annual exclusion as well, and some gifts are exempt from taxation altogether, so they don't count against either the exemption or the exclusion.
The lifetime exemption has increased steadily over the years, while the gift tax rate has remained steady since 2012, when it increased under the American Taxpayer Relief Act. The top tax rate is 40% as of 2021.
The Effect of Legislation
The gift tax was based on the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act (TRUIRJCA) from 2010 through 2012. The TRUIRJCA was signed into law by President Barack Obama on December 17, 2010. The law was only supposed to be in effect for two years.
President Obama then signed the American Taxpayer Relief Act, known as ATRA, into law on January 2, 2013. ATRA made certain TRUIRJCA provisions permanent. These provisions affected both the federal estate tax and the gift tax.
Then came the Tax Cuts and Jobs Act (TCJA), signed by President Trump on December 22, 2017. The TCJA went into effect in January 2018 and made a significant change to the estate and gift tax exemption, virtually doubling it.
The federal estate and gift tax exemption is indexed for inflation to keep pace with the economy.
The two taxes share the same exemption, often referred to as the "unified tax credit," which is adjusted periodically to keep pace with inflation.
Lifetime Exemptions and Rates 2000-2021
|Year||Gift Tax Exemption||Top Gift Tax Rate|
How the Annual Gift Tax Exclusion Works
The annual gift tax exclusion is $15,000 for tax years 2020 and 2021. You can give up to this amount in money or property to any individual annually without incurring gift tax. If you want to give gifts to two people, they can total $30,000. You can give $45,000 to three people. The exclusion is per person per year.
You'd have a choice to make if you were to give your child $20,000 in one calendar year. You could either pay the gift tax on the additional $5,000 over the $15,000 annual exclusion, or you could apply it to the unified lifetime exemption.
The lifetime exemption was worth $11.58 million for tax year 2020. It increased to $11.7 million in 2021.
The Unified Credit
You can use the unified credit to shelter your estate from taxation when you die, and you can use it to defray the tax burden of giving more than the annual gift tax exclusion to any individual in a given year, but the exemption is shared between these two taxes.
You would need to file a gift tax return using Form 709 if you were to decide to apply that $5,000 overage to the unified credit. You would indicate on the return that you want to choose that option. The $5,000 would then be deducted from your lifetime exemption.
You would have $5,000 less to protect your estate from estate taxation when you die. Of course, $5,000 would hardly be missed from an $11.7 million exemption, so this might be a pretty good deal if you have nowhere near $11 million-plus in assets.
Using it to cover gifts in excess of the annual inclusion can cost your estate money that would otherwise go to your heirs, however, if you expect to have considerable wealth by the time you die, enough that the $11 million-plus unified credit might not shelter your entire estate.
Some Gifts Are Tax-Free
Some additional exemptions and provisions exist for special gifts.
- You can pay a student's qualifying tuition expenses free of tax in any amount without incurring the gift tax, provided that you give the money directly to the educational institution.
- You can give as much as you like to qualified charities that are approved by the IRS, without incurring a gift tax.
- You can pay someone else's medical bills, up to any amount, as long as you pay the care providers and institutions directly. As with the exemption for tuition, the money can't pass through the beneficiary's hands.
If You're Married
Marriage effectively doubles your annual exclusion, because you can "split" your gifts with your spouse. Remember that $20,000 you gifted your child that went $5,000 over the $15,000 annual exclusion? Only $10,000 of that would count against your annual exclusion if you're married, because you and your spouse can each give your daughter half of the gift.
Instead of going $5,000 over your exclusion, you and your spouse would each have $5,000 of your respective annual exclusions left.
You can also give to your spouse to your heart's content without incurring gift tax, provided they're a U.S. citizen. Otherwise, gifts to a non-citizen spouse are excluded up to a total of $157,000 a year as of tax year 2020.
The Bottom Line
The lifetime gift tax exemption lets the average American give away a lot of money and property tax-free, but consider consulting a CPA or an attorney before deciding to dip into it if you expect that your estate will be sizable.