With the arrival of the new year, revisions to the annual gift tax and estate tax exclusions will be going into effect, as recently announced by the Internal Revenue Service (IRS).
Gift Tax Exemption for 2024
Every calendar year, you can gift up to a certain amount to another individual (or individuals) tax-free. These gifts can include cash as well as other types of property. The IRS typically adjusts this gift tax exclusion each year based on inflation.
Starting on January 1, 2024, the annual exclusion on gifts will be $18,000 per recipient (up from $17,000 in 2023). A married couple filing jointly can double this amount and gift individuals $36,000 apiece in 2024.
This means that if an individual taxpayer gifts less than $18,000 to any one person during 2024, they generally don't have to report the gift to the IRS. However, if they gift more than $18,000 to someone in 2024, the gift giver must then file a gift tax return. (Note that the gift giver may not necessarily have to pay a gift tax when giving a gift of more than $18,000 to someone. This is because they can choose to apply their lifetime gift tax exclusion. Learn more about lifetime gift tax limits below.)
2024 Federal Estate Tax Exemption
The federal estate tax exemption is also set to increase come 2024. It will rise to $13.61 million in 2024 (up from $12.92 million in 2023). For couples, this exemption will equal $27.22 million.
In other words, an individual's estate valued at less than $13.61 million in 2024 will not be subject to federal estate taxes. Most people, of course, are not multi-millionaires. Today, heirs of only a small fraction of the most affluent Americans need worry about the impact of the federal estate tax. (State estate taxes are a different story; those vary depending on where you live.)
Imagine Vanessa, a successful, single business owner with a total taxable estate worth $16 million. As a wealthy individual, Vanessa would likely want to consider how federal estate taxes could affect her heirs. If she were to pass away in 2024, her $16 million estate would exceed the $13.61 million threshold and owe the IRS a federal estate tax.
This is why very affluent people may choose to gift assets to loved ones during their lifetime. It is one way to help cut down on the taxes their estate will need to pay upon their death.
Combined Gift and Estate Tax Exclusions
Over the course of your lifetime, you can give away only up to a certain amount before the IRS imposes taxes. This limit is called the lifetime, or combined, gift and estate tax exemption. Because it's linked to the federal estate tax exemption, it, too, is set to increase in 2024 – to $13.61 million for individuals and $27.22 million for couples.
Perhaps Vanessa decides to give a vacation home worth $1 million to her only child. She could take advantage of the lifetime gift and estate tax exemption by deducting $982,000 from her combined exemption ($1 million minus $18,000 = $982,000). This would allow Vanessa to give away another $12.62 million in assets before meeting her lifetime gift exclusion limit ($13.61 million minus $982,000 = $12.62 million).
It's important to note that this high lifetime gift and estate tax exclusion of $13.61 million is currently on track to decrease drastically at the end of 2025, to about $6 million. For high-net-worth individuals who die in 2026, there may be tax implications for their estates. (Read more about the sunset of the Tax Cuts and Jobs Act and strategies that may help avoid any negative impacts.)
Consult With Your Estate Planner
The rules regarding gift and estate taxes can get quite complex quickly. For instance, on top of federal taxes, some states impose an estate tax and even an inheritance tax. Consult with your estate planning attorney. They can help you maximize your legacy by finding the best tax planning strategies for your situation.