The Lifetime Exemption for Federal Gift Taxes
The exemption is very generous, at least through 2025
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 2020.
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 Dec. 17, 2010, and it 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 Jan. 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 it 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, and it's 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 one individual annually without incurring a 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 gave your child $20,000 in one calendar year. You can either pay the gift tax on the additional $5,000 over the $15,000 annual exclusion, or you can apply that extra $5,000 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 must file a gift tax return using Form 709 if you decide to apply that $5,000 overage to the unified credit. You would indicate on the return that you want to apply the lifetime exemption provided by the unified credit. The $5,000 would then be deducted from your lifetime exemption.
Now you'll 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 each have $5,000 of your respective annual exclusions left.
You can also give to your spouse to your heart's content without incurring a 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 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.
Tax Policy Center. "How Do the Estate, Gift, and Generation-Skipping Transfer Taxes Work?" Accessed Nov. 30, 2020.
Congress.gov. "H.R.4853 - Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010." Accessed Nov. 30, 2020.
Congress.gov. "H.R.8 - American Taxpayer Relief Act of 2012." Accessed Nov. 30, 2020.
Congress.gov. "Tax Cuts and Jobs Act." Accessed Oct. 30, 2020.
IRS. "IRS Provides Tax Inflation Adjustments for Tax Year 2021." Accessed Nov. 30, 2020.
IRS. "Instructions for Form 709." Page 2. Accessed Nov. 30, 2020.
IRS. "Instructions for Form 709." Page 6. Accessed Nov. 30, 2020.
IRS. "Frequently Asked Questions on Gift Taxes for Nonresidents not Citizens of the United States." Accessed Dec. 1, 2020.