The Lifetime Exemption for Federal Gift Taxes

The exemption is very generous, at least through 2025

Man giving woman a gift as they're seated on a sofa
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The lifetime exemption from paying federal gift taxes is a dollar amount that you can give away over the course of your lifetime without paying the tax. And yes, it's the giver, not the recipient, who must pay it. The Internal Revenue Code (IRS) provides for an annual exclusion as well. Some gifts are exempt from taxation altogether. 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 gift tax rate is 40% as of 2022. 

Key Takeaways

  • The lifetime exemption is an amount of property or cash that you can give away over the course of your entire life without having to pay a gift tax. 
  • The exemption is shared with the value of your estate at the time of your death, combined by a tax provision called the Unified Tax Credit.
  • The unified tax credit is in addition to a gift tax exclusion, an amount you can give away per person per year without dipping into the credit.
  • Both the exemption/credit and the exclusion are indexed for inflation so their amounts can adjust yearly.


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.

The federal estate and gift tax exemption is indexed for inflation to keep pace with the economy.

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. It made a significant change to the estate and gift tax exemption, virtually doubling it.

The gift tax and the estate tax share the same exemption, often referred to as the "unified tax credit." The amount is adjusted to keep pace with inflation, often on a yearly basis.

Lifetime Exemptions and Tax Rates 2000-2022

Year Gift Tax Exemption Top Gift Tax Rate
2000 $675,000 55%
2001 $675,000 55%
2002 $1 million 50%
2003 $1 million 49%
2004 $1 million 48%
2005 $1 million 47%
2006 $1 million 46%
2007 $1 million 45%
2008 $1 million 45%
2009 $1 million 45%
2010 $1 million 35%
2011 $5 million 35%
2012 $5.12 million 35%
2013 $5.25 million 40%
2014 $5.34 million 40%
2015 $5.43 million 40%
2016 $5.45 million 40%
2017 $5.49 million 40%
2018 $11.18 million 40%
2019 $11.4 million 40%
2020 $11.58 million 40%
2021 $11.7 million 40%
2022 $12.06 million 40%

How the Annual Gift Tax Exclusion Works

The annual gift tax exclusion is $16,000 for tax year 2022, up from $15,000 from 2018 through 2021. You can give up to this amount in money or property to any individual per year without incurring a gift tax. Your gifts can total $32,000 for the year if you want to give two people each the annual exclusion amount. You can give $48,000 to three people. The exclusion is per person per year.

You'd have a choice to make if you wanted to give your child $20,000 in calendar year 2022. You could either pay the gift tax on the additional $4,000 over the $16,000 annual exclusion, or you could apply it to the unified lifetime exemption.

The lifetime exemption was worth $11.7 million for tax year 2021. It increased to $12.06 million in 2022.

The Unified Tax 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 have to file a gift tax return using Form 709 if you were to decide to apply that $4,000 overage to the unified credit. You would indicate on the return that you want to choose that option. The $4,000 would then be deducted from your lifetime exemption.

You would have $4,000 less to protect your estate from estate taxation when you die. Of course, $4,000 would hardly be missed from an $12.06 million exemption. This might be a pretty good deal if you have well below $11 million-plus in assets.

Using the credit to cover gifts in excess of the annual inclusion can cost your estate money that would otherwise go to your heirs if you expect to have considerable wealth by the time you die, enough that the $12 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 also give as much as you like to qualified charities without incurring a gift tax, as long as they're approved by the IRS.

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 doubles your annual exclusion. You can "split" your gifts with your spouse. Remember that $20,000 you gifted your child that went $4,000 over the $16,000 annual exclusion? Only $10,000 of that would count against each of your annual exclusions if you're married, coming in under the $16,000 limit, or you could give $32,000 instead. You and your spouse could each give your child half the gift, or you could each give them the full annual exclusion amount.

You and your spouse would each have $4,000 of your respective annual exclusions left instead of going $4,000 over the limit if you were unmarried.

You can also give to your spouse to your heart's content without incurring a gift tax, as long as they're a U.S. citizen. Gifts to a non-citizen spouse are excluded up to a total of $164,000 per year as of tax year 2022.

The Bottom Line 

The lifetime gift tax exemption lets the average American give away a lot of money and property tax free. Think about consulting a CPA or an attorney before deciding to dip into it if you expect that your estate will be sizable.

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