Big news from the IRS for 2025: due to inflation adjustments, the annual gift tax exclusion and the estate and gift tax exemption are both set to rise. Below is a rundown of what these changes mean for individuals and families looking to optimize their gifting and estate planning strategies.
Annual Gift Tax Exclusion
What’s New?
• The annual gift tax exclusion amount will increase to $19,000 per recipient in 2025, marking the highest exclusion amount ever.
• This means you can gift up to $19,000 to any one individual in 2025 without affecting your lifetime estate and gift tax exemption.
• Married couples can combine their exclusions, effectively allowing $38,000 per recipient in 2025.
Why Does This Matter?
• By using the annual gift tax exclusion, you remove assets (and future appreciation on those assets) from your taxable estate.
• For example, if a married couple has three children and five grandchildren, they could transfer a total of $304,000 in 2025 ($38,000 × 8 recipients) without dipping into their combined lifetime exemption.
Gifts to a Non-US Citizen Spouse
Unlimited Marital Deduction vs. Spousal Limitations
• Typically, if both spouses are US citizens, they enjoy an unlimited marital deduction for transfers between each other. However, when one spouse is not a US citizen, the IRS limits how much can be transferred tax-free each year.
• In 2025, the first $190,000 of gifts to a non-US citizen spouse will be excluded from taxable gifts.
Why the Limit?
• The IRS imposes this restriction because a non-US citizen spouse may not be subject to US estate tax. If an unlimited amount were transferred, the assets could potentially escape US estate taxation altogether.
Lifetime Estate and Gift Tax Exemption
Increased Exemption for 2025
• The lifetime estate and gift tax exemption for 2025 will be $13.99 million per individual, up from $13.61 million in 2024.
• This means a married couple can shield $27.98 million from federal estate or gift taxes.
• If you’ve already maxed out your gifting, the new limit allows an additional $760,000 of tax-free gifting starting in 2025.
How It Works
• Any gifts you make in excess of the annual gift tax exclusion ($19,000 per recipient in 2025) begin to “use up” a portion of your $13.99 million lifetime exemption.
• Because the gift and estate tax exemptions are linked, using your gift tax exemption today will reduce how much remains for estate tax purposes down the road.
Important Note for 2026
• Under current law, the increased exemption amount will be cut in half at the start of 2026. This means the window to take advantage of these higher limits is limited and should factor into your long-term estate planning decisions.
Key Takeaways
1. Annual Exclusion Jumps to $19,000: A higher annual gift tax exclusion gives you more tax-free gifting power to individuals each year.
2. Non-US Citizen Spouse Gifting Limit: $190,000 in 2025 helps ensure the IRS eventually collects tax on assets that might otherwise escape US taxation.
3. Lifetime Exemption Rises: $13.99 million per individual (or $27.98 million for a married couple) allows more of your estate to pass tax-free—until the scheduled decrease in 2026.
4. Plan Ahead: To maximize these opportunities, consider strategies to gift assets now while the exemption is higher, especially if your estate could be impacted by the looming reduction after 2025.
Whether you’re considering making significant gifts in 2025 or reevaluating your overall estate plan, these increased thresholds could have a substantial impact on your tax strategy. As always, it’s wise to consult with a qualified tax or estate planning professional to ensure you’re fully leveraging the new limits and safeguarding your assets for the future.