Are you going to share your wealth with your loved ones in the upcoming 12 months? The IRS is good news. In 2025, the annual gift tax exclusion is changing, which means for the next four years, generous people will be able to gift assets without paying a tax. However, before you begin writing checks to these advisors, let’s explore the details of this important update and its potential impact on your tax planning strategy.
Is 2025 being more Generous than 2020?
Gift givers can breathe a sigh of relief, as the IRS rarely gets press for raising the level of generosity, but for a change, it will in 2025. Also rising is the annual gift tax exclusion to $19,000 per recipient starting in 2024, compared to $18,000 in 2024.
That means you can transfer up to $19,000 to as many people as you want per year without reporting the gifts and without tapping your lifetime estate and gift tax exemption. This $38,000 per recipient becomes doubled for each married couple who chooses to split gifts.
Why does this matter? Life imprisonment for wealth transfer is a complex thing, too, not just because of what you earn but also because of how you plan to exit this life.
May Helping Hand Result in Unwanted Tax Tab?
Not everyone realizes that the act of their generosity could result in a tax bit. The truth might surprise you.
However, if you exceed the annual exclusion amount per recipient, you do not owe gift taxes immediately. You must do this by filing a gift tax return (Form 709), and the excess amount will apply against your lifetime estate and gift tax exemption.
The projected lifetime exemption for 2025 is about $13.61 million per individual. You’d only actually pay gift taxes not from your pocket, but only after exhausting this generous lifetime limit.
So, what does this mean about your income tax situation? In most cases, the person who gives the gift can assume the tax responsibility. The person typically doesn’t list them as ‘income tax’ items on their tax return.
What are the creative strategies for multiple Tax-free giving?
That brings us to a point of strategic tax planning that gets interesting. In each case, the annual exclusion applies on a per-recipient basis and not in every case on a per-donor basis. This opens fascinating possibilities.
Imagine a family of four giving to a family of four. In 2025, each giver can give $19,000 to each recipient and transfer up to $304,000 tax-free in a single year.
There are some gifts which do not count toward the annual limit:
- Payments made to educational institutions on behalf of a student for tuition.
- Care paid by the patient directly to medical providers
- Gifts to qualifying charities
- Gifts to spouses
These exceptions, in turn, provide highly attractive tax planning opportunities that individuals who understand them use to construct their wealth transfer strategies.
Is All This Distraction Really Necessary?
The gift tax rules are largely beyond the headline number of $19,000 and are worth exploring. You know that if you split a gift with your spouse, the amount must be reported on a gift tax return, even if the amount is below the exclusion.
You can also facilitate gifts to certain trusts for the benefit of two or more people while you still get to meet the annual exclusion. Even given the fact that no tax is due, proper income tax and gift tax documentation is extremely important. If you don’t file the required forms, you may, of course, pay up later, and you certainly don’t want to be in that position.
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How Should Your 2025 Gift Strategy Be?
2025 gives you an ideal opportunity to review your wealth transfer plans with the increased exclusion amount. Consider these approaches:
- Provide scattered gifts over the year to aid the receiver in lumps of money.
- Work with your spouse for the most possible split gift potential
- Appreciate assets (though basis aware) look past cash
It may be worthwhile to form joint or split gift trusts that can receive exclusion gifts each year.
Don’t forget, though, that there are people out there who do not plan their taxes to reduce their taxes but rather plan to navigate their taxes so as to make sound financial decisions.
Planning Your Next Steps
The 2025 gift tax exclusion increase gives you more flexibility, but growing it is more difficult and requires thought. However, everyone’s situation is so unique that one person’s family will have different things that work, and another won’t.
Incorporating the 2025 annual gift tax exclusion into an overall tax planning strategy is just part of the picture, as we can discuss how to integrate this into your comprehensive planning. For that purpose, H&M Tax Group would be glad to assist you. Of course, as always, you are going to have experienced advisors who can help you through the complexities of wealth transfer and, at the same time, keep you compliant with changing tax laws. If you do proper planning, then your generosity can go further without creating unanticipated tax consequences for you.
