Published on April 5, 2024

Do you consider gifting to loved ones or others as part of your wealth management planning? Many people overlook the power of the annual gift exclusion as an easy way to make tax-free gifts as well as reduce one’s estate. With the increase in the gift tax exclusion in 2024, an individual can gift up to $18,000 to as many people as they would like without it impacting their lifetime gift exclusion.

Many people enjoy giving financial gifts if they have the means to do so. However, financial gifts are not without costs. The IRS requires any gifts over $18,000 to be memorialized in a gift tax return, and these gifts count against your Lifetime Gift Tax Exclusion. Understanding how the gift exclusion works can allow you to make gifts over time without filing an extra tax return or impacting your lifetime gift tax exclusion. 

What Is the Annual Gift Exclusion?

When you give assets or property to someone besides your spouse, you may be required to pay the IRS anywhere from 18% to 40% of federal excise tax on the amount, depending on the size of the gift. As with federal income tax, these tax rates are marginal, so the larger the gift, the more taxes you potentially pay. There are two components to the gift exclusion: 

*Note that assuming there is no extension to the current lifetime gift exclusion limit, on January 1, 2026, the lifetime exclusion will revert to its pre-2018 level of approximately $5 million per individual.

The annual gift exclusion allows you to give a certain amount each year to another individual, or multiple individuals, without triggering gift taxes or tax filings. More importantly, these gifts do not count towards your lifetime gift tax exclusion amount, which is currently set at $13.6 million per person. 

How Annual Gifts Add Up

The total value of annual gifts over time can potentially add up to a significant number. In 2024, the annual gift tax limit increased from $17,000 to $18,000 per person, or from $34,000 to $36,000 per person for married couples (or couples filing a joint tax return).

For example, if someone gifted the maximum amount each year for the past ten years ending in 2023, the total gifts would add up to $149,000. With a partner gifting as well, the amount would double to just under $300,000. 

If you are married and have two children, you and your spouse could each gift $36,000 ($18,000 per child) for a total of $72,000 every year without having to file a gift tax return or pay taxes on it, as long as you make the gifts before December 31 of that year. (Note that there are also exceptions to the gift tax, such as school tuition, charitable donations, and political contributions.)

Another way to look at it is how much you could potentially give each year per person. The below chart illustrates how $18,000 per recipient can add up. 

How Annual Gifts Work

You can gift cash as well as assets such as stocks, real estate, or even investments in a tax-advantaged account such as a 529 college savings plan. 

As an individual, if you do not exceed $18,000 of gift value per recipient, the amount is not subject to tax, and you do not need to worry about reporting it to the IRS. However, for amounts that exceed $18,000 per recipient, you will need to file a gift tax return (Form 709) in addition to your federal tax return the following year. That does not necessarily mean you will owe money; it just means you need to report it. The value of any gifting that exceeds the annual gift exclusion each year counts against your lifetime gift exemption ($13.6 million). If a gift exceeds the annual exclusion limit, the difference is simply subtracted from the person’s lifetime exemption limit and no taxes are owed. The gifts are also tax-free for the receiver.

If you are married or filing a joint tax return, you can take advantage of “gift-splitting,” which is when you and your partner combine your annual exclusions to give someone $36,000 without needing to file a gift tax return.

The table below illustrates the following example: A woman decides to give her daughter $50,000 to help her make a down payment on a new home. Though that amount surpasses the $18,000 exclusion limit by a total of $32,000, she would not owe additional taxes because she would report the gift to the IRS using Form 709 and deduct $32,000 from her lifetime exemption. Going forward, she would still be eligible to give away up to $13,578,000 tax-free.

How You Can Benefit

If you do not gift anything during your lifetime, you will have your entire lifetime exclusion amount to use against your estate when you die. However, by making use of the annual exclusion year after year, you can gradually whittle down your taxable estate while transferring money to family members or other loved ones. 

For instance, as in the example above, you may want to help your child with a down payment on their first home, or maybe you want to spoil your grandkids with a special gift. By taking advantage of this increased exclusion, you can do so without worrying about tax implications.

The bottom line is that annual gifting is a valuable strategy that can help you manage your wealth and support your loved ones in a tax-efficient manner.  So, whether you are planning your holiday gift-giving or looking to optimize your estate plan, consider tapping into the power of the annual gift exclusion. It could be a win-win situation for both your finances and your relationships.

Next time you are thinking about sharing the wealth, keep the $18,000 annual gift exclusion in mind. It is a small change that could make a big difference in how you handle your finances. Stay informed, stay generous, and most importantly, stay within the limits.

If you are interested in discussing this topic in more detail, please reach out and we can set up a time to talk.

Christopher Zand, J.D., CFP®

Vice President & Director of Private Client

Osterweis Capital Management does not provide tax, legal, or accounting advice. In considering this communication, you should discuss your individual circumstances with a professional in those areas before making any decisions.