With dramatic changes to federal estate and gift tax rules scheduled to take effect in 2026, taxpayers should review their giving plans for 2025 to ensure they receive the maximum exclusion.
Under the Tax Cuts and Jobs Act of 2017 (TCJA), the lifetime gift/estate tax exclusion is scheduled to decrease from $13.99 million in 2025 ($27.98 million for married couples filing jointly) to an estimated (depending on inflation) $6 million as of January 1, 2026.
For individuals and families with substantial assets, the potential reversion of the exemption to pre-2018 levels mean they could face a limited-time opportunity to preserve more wealth for future generations by making gifts under current exclusion levels before the scheduled expiration of the TCJA.
Understanding the Lifetime Gift Tax Exclusion
One of the major provisions of the TCJA was the more-than-doubling of the federal lifetime gift and estate tax exemption. Before the act was signed into law, the exemption was $5.49 million per person in 2017. Under the TCJA, that amount increased to $11.18 million in 2018 and it has continued to rise with inflation each year.
Under current rules, individual taxpayers can transfer up to $13.61 million (for 2024) during their lifetime, or through their estate at death, without being subject to the 40% federal estate and gift tax. Any amounts gifted or transferred that exceed the exemption are taxed at this rate, which can significantly reduce the amount of wealth passed down to heirs.
This beneficial increase is scheduled to sunset at the end of 2025, meaning the exemption will revert to 2017 levels (adjusted for inflation). This would subject more assets to gift taxes and create significant tax liabilities that could reduce the value of high-net-worth estates significantly.
Taxpayers whose estates are valued near current exemption levels, or may reach those levels with appreciation over the next two years, may want to consider making gifts (outright or via irrevocable trust) before 2026 to fully take advantage of the increased exemption amount.
Individuals who make large gifts under the TCJA’s higher exemption will not face a “clawback” when the exemption amount decreases in 2026. For example, if someone gives $12 million in 2024 and the exemption drops to $6 million in 2026, the IRS will not retroactively apply the lower exemption to prior-year gifts.
Understanding the Annual Gift Tax Exclusion
The Annual Gift Tax Exclusion enables taxpayers to transfer substantial amounts, free of gift taxes, to their children or other recipients each year. The amount of the exclusion for 2024 is $18,000 per recipient. For example, a taxpayer with three children can transfer a total of $54,000 to his or her children every year free of federal gift taxes or the need to file a federal gift tax return. If annual gifts exceed $18,000, the exclusion covers the first $18,000 and only the excess is taxable.
Unlike the lifetime exclusion, the annual gift tax exclusion is not scheduled to sunset under the TCJA. The annual gift tax exclusion is a separate provision from the lifetime exemption that is set to sunset at the end of 2025.
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