Tax-Free Gifts in 2025
January 27, 2025
By: Martha Griffin
For many, the Lunar New Year (January 29, 2025) brings to mind images of cash tucked into bright red envelopes along with excitement (or anxiety) over the amount of anticipated annual gifts. Whether you are planning to make gifts in January or waiting until later in the year, have you considered whether you will be required to file a federal gift tax return and/or pay federal gift tax?
Annual Exclusion Gifts
Generally, U.S. citizens (and noncitizens domiciled in the U.S.) must report gratuitous transfers made during each calendar year on a federal Form 709, which is due on April 15th of the following calendar year. However, taxpayers are exempt from this filing requirement if the total amount given to each donee throughout the calendar year is below a specified threshold, known as the “annual exclusion amount,” which is adjusted for inflation each year. In 2025, you may give up to $19,000 per donee (increased from $18,000 per donee in 2024) to as many individuals as desired without triggering any federal gift tax reporting requirements or paying any federal gift tax. Since gifts to a noncitizen spouse in excess of the annual exclusion typically would not qualify for the marital deduction and would therefore be taxable gifts, a larger annual exclusion amount is available for gifts to a noncitizen spouse – $190,000 in 2025 (increased from $185,000 in 2024). Gifts that exceed the annual exclusion amount are considered taxable gifts, with a couple of exceptions described below.
You cannot carry your annual exclusions forward into future years if you forget to make gifts by December 31st, nor can you use the annual exclusion to shield transfers at death if you die during the calendar year. Annual exclusion gifts usually take the form of outright transfers to the recipient, but indirect transfers may qualify for the annual exclusion so long as the recipient is deemed to have a present interest in property. (For example, transfers to a custodian or guardian on behalf of a minor, and transfers to a trust that grants a current withdrawal right to one or more beneficiaries, will meet the present interest requirement and count toward the annual exclusion threshold.) Annual exclusion gifts do not have to be made in cash, but an appraisal will be needed if other types of property are gifted.
Over the course of your lifetime, significant wealth can be transferred (tax-free) by taking advantage of annual exclusion gifting opportunities every year. It makes sense to give early in the year so that the recipient has more opportunities to benefit from the growth or use of the funds, but you should first consider any other transfers you may need or want to make to the donee throughout the rest of 2025. Will you also want to give this donee a gift on his or her birthday or during the December holiday season? Are you planning to cover expenses for this donee on a family vacation this summer? Will you need to reserve all or part of the annual exclusion to shield transfers to a life insurance trust that grants this donee withdrawal power? Many types of transfers will be categorized as gifts for federal tax purposes, and each transfer that conveys a present interest will apply against the annual exclusion amount. Going even $1 over during the calendar year will require the filing of a federal gift tax return, even if no gift tax is actually owed. If you are uncertain about the amount of other gifts you will make throughout the year, then you may find it easier to tally your year-to-date gifts in early December and then give what remains of the annual exclusion amount to each donee.
Married Couples Can Double
If you are married, you and your spouse may separately give up to $19,000 to all of the same donees, and neither of you will be required to file a gift tax return. If your spouse is not inclined to be so generous (but does not object to you giving more), then you could utilize your spouse’s annual exclusion by giving up to $38,000 per donee and filing a gift tax return (which your spouse must also sign) consenting to gift-splitting for all gifts made by either spouse in 2025.
Qualified Payments that are Not Gifts
Federal tax law provides that certain types of transfers do not count as gifts. Any amount that you are legally required to pay for the support of a dependent under applicable state law will not count toward your annual gifting threshold. In addition, payments to a medical provider for someone’s medical care or to an educational institution as tuition are not considered taxable gifts (regardless of whether the patient/student is a dependent), so these payments do not count toward the annual exclusion. There is no limit on the amount of qualifying medical or tuition payments so long as you pay the medical provider or educational institution directly. If you reimburse the patient/student for the expense (or advance the funds to pay the expense – including transfers to a 529 plan or an UTMA account), your transfer will be treated as a gift.
Feeling Generous?
Annual exclusion gifts and qualified payments for medical/tuition expenses provide great opportunities for the tax-free transfer wealth, but this is only the tip of the iceberg. Effective January 1, 2025, U.S. citizens (and noncitizens domiciled in the U.S.) may transfer up to $13,990,000 – via lifetime gifts or transfers that take effect upon death – free of any federal gift, estate, and generation-skipping transfer (“GST”) taxes. The exceptionally high exemption amounts are attributable to temporary provisions of the Tax Cuts and Jobs Act of 2017, which doubled the prior $5,000,000 exemption amounts and provided for annual inflation adjustments for transfers in 2018 through 2025. These temporary tax cuts (and others) are scheduled to expire at the end of this year, and on January 1, 2026 the exemption amounts will revert to the amounts available under prior law (projected to be approximately $7,000,000 after inflation adjustments). It is widely anticipated that Congress will extend the 2017 tax cuts or even make them permanent, and the Trump administration has also promised to lower the corporate tax rate. Nevertheless, tax reform seems likely to be delayed by the need to address government funding and the debt ceiling before March 15th. Furthermore, there are obstacles to using the budget reconciliation process to extend the 2017 tax cuts with a simple majority vote, including projections by the Congressional Budget Office that a ten-year extension of the 2017 tax cuts would add $4.6 trillion to the national deficit. Congressional leaders recently identified other issues (such as border control and energy) that may be given legislative priority if the proposed changes to the tax laws require bipartisan support in the form of 60 senate votes. Timing will be key in navigating legislative uncertainty this year. We recommend consulting with your attorney or other tax advisors to ensure that you are poised to make any desired gifts in the event that the 2017 tax cuts are allowed to expire at the end of 2025.