Are you feeling extra generous this holiday season? If you’re thinking of giving large gifts and worried about paying a gift tax, don’t worry. Most people don’t pay a gift tax because of the exceptionally large lifetime gift tax exclusion.
In 2025, the lifetime gift tax exclusion will increase to $13.99 million for individual filers, and to $27.98 million for married couples filing jointly.
In 2024, the lifetime gift tax limit is $13.61 million for individuals and $27.22 million for married couples.
However, 2025 could be a critical year for gift tax laws. That’s because the high lifetime gift tax exclusion was thanks to the Tax Cuts and Jobs Act (TCJA), a monumental tax overhaul signed into law in 2017 during President-elect Donald Trump’s first term.
And major provisions of the TCJA including the lifetime gift tax exclusion are set to expire at the end of 2025. That would reduce the lifetime exclusion to pre-2017 levels at an estimated $7 million.
But under the second Trump term and a Republican-controlled Congress, it’s possible this provision could be extended. But with a high deficit, it’s also possible that some Republicans choose to steer away from prolonging major tax cuts.
What Is the Gift Tax?
The gift tax is a federal tax on money, property, and assets transferred to another individual without expecting anything in return. The giftee is typically the person who pays the applicable gift tax.But most people won’t need to pay a gift tax or even report gifts to the IRS because of the annual gift tax exclusion.
The annual gift tax exclusion is the value in gifts you can transfer to another person without having to report it to the IRS.
In 2025, the annual gift tax exclusion will increase to $19,000 per person. This means you could give $19,000 each to your sister, an uncle, and a friend without having to file a gift tax return.
And for married couples, it will rise to $38,000. So a couple could together give $38,000 to a family member or friend without having to report it to Uncle Sam.
In 2024, the annual gift tax exclusion is $18,000 for individuals and $36,000 for married couples.
If you go beyond the annual gift tax exclusion, you'd generally just need to report the gift on IRS Form 709. This doesn’t necessarily mean you’d owe a gift tax.
How Does the Lifetime Gift Tax Exclusion Work?
Some financial advisers say you should think of the lifetime gift tax exclusion as a large tub and the annual gift tax exclusion as a small bucket.When you go over your annual gift tax exclusion or fill this bucket, the excess amount spills over into the lifetime gift tax exclusion pool.
So say that in 2025, you give your brother $25,000. The extra $6,000 ($25,000 minus $19,000) falls into the lifetime gift tax exclusion tub.
What Are the Gift Tax Rates?
Individuals usually pay gift taxes on the amounts that exceed the lifetime gift tax exclusion, which is $13.99 million in 2025.The tax rates range from 18 percent to 40 percent on those excess amounts. Here is how that breaks down:
How to Mitigate Gift Taxes
There are some ways you can shield yourself from gift taxes. For example, you can spread gifts over the years.Let’s say that in 2025, you want to give your brother $25,000. But the annual gift tax exclusion is $19,000. You can give him $19,000 in 2025 and the remaining $6,000 in 2026. This would help you stay within annual exclusion limits and no excess amount would flow into your lifetime gift tax exclusion.
And keep in mind that annual gift tax exclusions are adjusted for inflation.
In addition, you can split gifts with your spouse. The annual gift tax exclusion for married couples in 2025 is $38,000. So let’s say you want to give your daughter $20,000. That would breach your individual exclusion of $19,000. But you and your spouse can gift your daughter $10,000 each for a total of $20,000 without exceeding the married couple’s annual gift tax exclusion of $38,000. This is known as “gift splitting.” But in this case, both spouses must file a federal gift tax return. Gift splitting can get complicated and may not always be the best financial choice for all couples. You should consult a tax adviser before proceeding.
Still, there are other ways to shield money from gift tax. For example, money sent directly to an educational institution on behalf of someone else is not a taxable gift.
This means that if you want to give your son $30,000 for college tuition, you can send it directly to the school and avoid gift tax. But avoid sending it directly to your son, as the IRS would see this as a gift going above your individual exclusion.
A similar situation exists when it comes to medical bills. If you send money directly to a medical institution or insurance company to cover someone else’s medical expenses, it’s not a taxable gift either.
Overall, it’s important to remember that the current lifetime gift tax exclusion could be renewed or reduced dramatically after 2025. It’s always a good idea to consult a qualified tax and estate-planning adviser when managing your gift making.
