2024 & 2025 Estate & Gift Tax - What are they and how do they work?
What is an estate tax and a gift tax and how are they different?
The federal estate tax applies to the transfer of property at death. The gift tax applies to transfers made while a person is living. The generation-skipping transfer (GST) tax is an additional tax on a transfer of property that skips one or more generations.
How much money can people exclude from estate and gift taxes?
When you die, you can leave up to $12.92 million (less any amounts previously given in excess of the annual exclusions) to your relatives or friends free of any federal estate tax.
(The figures adjust annually on January 1st and are adjusted for inflation, so based on current data, these are reasonable estimates.)
How do estate and gift taxes actually work?
In 2023, you can make annual gifts to any one person up to a maximum of $17,000 per year ($18,000 in 2024, estimated to be $19,000 in 2025). Spouses can elect to “split” gifts, which doubles the annual amount a married couple can give away in any year. These gifts will reduce the size of your estate and exposure to the estate of GST tax.
For example: In 2023, if a couple has one child, they could each gift up to $17,000 to the same child which would be a total gift to the child of $34,000 in 2023 without reporting the gift to the IRS. If they have multiple children, they could also decide to gift the same amount ($17,000 each or $34,000 per child) to each of their children in 2023.
Any gifts that exceed the annual exclusion amount count toward the lifetime exemption.
For example: In 2023, if a single parent has one child and they gift that child $25,000. Then, $8,000 would be subtracted from the federal estate tax lifetime exemption ($25,000 gift - the $17,000 gift tax exclusion amount) at the single parent’s death.
Can my spouse use my lifetime exemption?
If you're married, your spouse is entitled to a separate $12.92 million exemption and can inherit your unused lifetime exemption by filing an estate tax return on form 706.
Also, you can make direct payment on behalf of another person for medical expenses or tuition without counting any of these payments toward the annual gift or GST tax exclusions or lifetime estate tax exemption.