The Internal Revenue Service (IRS) has officially announced a welcome update for individuals and families looking to manage their estate and gift tax planning. Due to inflation adjustments, the annual gift tax exclusion is set to rise in 2025, reaching a historic high. This increase, coupled with adjustments to the estate and gift tax exemption, presents significant opportunities for tax-efficient wealth transfer. Understanding these changes is crucial for effective financial planning.
Annual Gift Tax Exclusion Set to Rise
For the year 2025, the annual gift tax exclusion will be $19,000 per recipient. This represents the maximum amount an individual can gift to another person in a single year without needing to report the gift to the IRS or use any of their lifetime gift and estate tax exemption. For married couples who choose to “split gifts,” this exclusion effectively doubles to $38,000 per recipient.
To illustrate, consider a married couple with two children and four grandchildren. In 2025, they could collectively gift $19,000 to each child and each grandchild – a total of eight recipients. This would allow them to transfer $38,000 x 8 = $304,000 out of their estate in a single year, completely free of gift tax, and without impacting their lifetime exemption. This strategy not only reduces their potential future estate tax liability but also allows the gifted assets and any future appreciation on those assets to grow outside of their taxable estate.
Gifts to a Non-US Citizen Spouse: Increased Annual Exclusion
The rules surrounding gifts to a spouse who is not a US citizen are different from those for citizen spouses due to potential estate tax implications. While gifts between US citizen spouses are generally unlimited, gifts to non-US citizen spouses are subject to an annual exclusion limit.
In 2025, this annual exclusion for gifts to a non-US citizen spouse will increase to $190,000. This significant amount allows individuals to provide substantial financial support to their non-citizen spouses without triggering gift tax obligations. This provision acknowledges the unique circumstances of bi-national couples and provides a mechanism for tax-efficient wealth transfer within these relationships.
Lifetime Estate and Gift Tax Exemption Jumps to Millions
Beyond the annual gift tax exclusion, the IRS also announced an increase to the lifetime estate and gift tax exemption for 2025. This exemption, which is unified for both gift and estate taxes, will rise to a substantial $13.99 million per individual. This means that an individual can gift up to $13.99 million during their lifetime, or pass that amount to their heirs upon death, without incurring federal estate or gift tax.
For married couples, utilizing portability, this exemption effectively doubles to $27.98 million. This substantial exemption level means that the vast majority of Americans will not need to be concerned about federal estate or gift taxes. For those with estates exceeding this amount, careful planning and utilization of the annual gift tax exclusion can be powerful tools to minimize potential tax liabilities.
It’s important to remember that while the 2025 increase is a positive development, current law dictates that the lifetime estate and gift tax exemption is scheduled to be cut in half starting in 2026. Therefore, individuals who can benefit from these higher exemption amounts should consider taking advantage of them in 2025. Consulting with an experienced estate planning attorney or financial advisor is recommended to understand how these changes apply to your specific situation and to develop a gifting strategy that aligns with your overall financial goals.
