The Lifetime Gift Tax Exemption and Annual Gift Tax Exclusion

There are tax-free limits on what you can gift in a year and during your lifetime.

While it may feel better to give than to receive, the former may carry federal tax consequences, which dampens the cheer associated with bestowing a financial gift to a loved one or friend. But not all financial gifts incur taxation by the federal government. Indeed, you are permitted to gift thousands of dollars each year and millions during your lifetime tax-free — as long as you follow IRS annual and lifetime gifting limits. To make sure that you avoid unexpected tax bills, below are key elements of the Gift Tax Exemption, which governs how the IRS measures and treats your financial gifts.

Overview of the Annual Gift Tax Exclusion and Lifetime Gift Tax Exemption

In 2020, the annual gift tax exclusion was $15,000, which means that you can gift up to that amount to any individual without incurring federal tax. For example, if you have five children, you can give $15,000 to each without paying tax on any of the gifts. If your gift exceeds $15,000, the overage amount counts toward the lifetime federal gift tax exemption. The lifetime gift tax exemption currently stands at $11.58 million. This means that you can gift up to that amount during your lifetime without incurring a gift tax, and if you’re married, both you and your spouse are entitled to the exemption ($23.16 million total). The exclusion and exemption limits have increased over time, so it’s best to check with your financial professional to determine the current thresholds.

Lifetime Gift Tax Exemption and the Estate Tax

The federal estate tax is triggered for estates whose value exceeds the lifetime gift tax exemption ($11.58 million). Like the gift tax exemption, this estate tax is transferable between spouses. If you gift more than the annual gift tax exemption to a recipient, the overage amount reduces your federal estate tax when you die. For example, if you gift $50,000 to your child in one year, the first $15,000 is nontaxable, due to the annual gift tax exemption. The remaining $35,000 counts toward your lifetime gift tax exemption and your federal gift tax exemption. All money in excess of that amount is subject to estate taxes.

What about State gift taxes?

Currently, Connecticut is the lone state to levy a gift tax. In 2020, the exemption equaled the federal exemption of $11.58 million.

Reporting requirements

You must report any gift that exceeds the $15,000 annual gift tax exclusion to the IRS when filing your taxes, even if you have not exceeded your lifetime gift tax exemption. To determine whether you owe gift taxes or other gift-related taxes, and to assess how to gift money while minimizing your tax consequences, consult a financial or tax professional.

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