The Internal Revenue Service (IRS) has officially announced some welcome news for those looking to give generously: the annual gift tax exclusion is set to increase in 2025 due to inflation adjustments. This means individuals can gift up to $19,000 per recipient without incurring gift tax, marking the highest annual exclusion amount to date.
For married couples, this figure doubles, allowing them to jointly gift $38,000 per recipient annually. Furthermore, the amount one can gift to a spouse who is not a U.S. citizen is also seeing a significant increase, jumping to $190,000 in 2025. Alongside these annual increases, the lifetime estate and gift tax exemption is also climbing to a substantial $13.99 million per individual for 2025, up from $13.61 million in 2024. This substantial rise means a married couple can now collectively shield nearly $28 million ($27.98 million) from federal estate and gift taxes. For those who have already made lifetime gifts, this increase opens the door to gift an additional $760,000 starting in 2025.
Annual Gift Tax Exclusion Boosted
Each year, the IRS establishes an annual gift tax exclusion. This provision allows taxpayers to gift a certain amount of money each year to any number of people without having to pay gift tax or even report the gifts to the IRS. For 2025, this “annual exclusion” is set at $19,000 per recipient. This is particularly advantageous as it allows individuals to reduce their taxable estate while supporting loved ones. Crucially, these annual gifts do not eat into your lifetime gift and estate tax exemption, which stands at a generous $13.99 million in 2025.
For married couples, the benefits are amplified. Utilizing gift splitting, a married couple can gift up to $38,000 per recipient in 2025 without tapping into their significant combined $27.98 million lifetime gift tax exemption. Consider a scenario where a married couple has three children and five grandchildren. In 2025, they could gift a total of $304,000 to their descendants without any gift tax implications. This strategy not only removes assets from their taxable estate but also ensures that any future appreciation of these gifted assets also avoids estate and gift taxes, maximizing wealth transfer.
Gifts to Non-U.S. Citizen Spouses: Higher Limit
Generally, in situations where both spouses are U.S. citizens, there’s no limit to the amount of assets they can transfer to each other without incurring gift tax. This is because the tax liability is typically deferred until the death of the surviving spouse. However, gifts to a spouse who is not a U.S. citizen are treated differently. The rationale behind this distinction is that a non-U.S. citizen spouse might not be subject to U.S. estate tax, potentially leading to the avoidance of U.S. taxation on transferred wealth.
Therefore, the tax-free gifting to a non-U.S. citizen spouse is capped at an annual exclusion amount, regardless of whether the spouse resides in the United States or not. For 2025, this annual exclusion for gifts to a non-U.S. citizen spouse has been increased to $190,000. This allows for substantial tax-free transfers to non-citizen spouses, acknowledging the unique circumstances of these relationships while still maintaining tax oversight.
Lifetime Estate and Gift Tax Exemption: Significant Increase
If an individual’s gifts in a given year exceed the annual gift tax exclusion, it doesn’t automatically trigger gift tax, thanks to the lifetime gift tax exemption. Instead, any amount exceeding the annual exclusion will draw upon the individual’s lifetime gift tax exemption, which is a substantial $13.99 million in 2025. It’s important to understand that the gift tax exemption and estate tax exemption are unified. This means that utilizing your gift tax exemption during your lifetime reduces the amount you can pass on estate tax-free at death.
For gifts exceeding the annual exclusion, a gift tax return (Form 709) must be filed by April 15 of the following year. This return serves to report the gift and track the amount of lifetime exemption used. While the increase to $13.99 million for the lifetime estate and gift tax exemption in 2025 is a significant benefit, it’s crucial to note that under current law, this amount is scheduled to be cut in half starting in 2026. Therefore, 2025 presents a potentially optimal window to maximize the benefits of this higher exemption.
