Federal Estate Tax Limit & Gift Tax Exclusion Limit Changing in 2024

At Kimbrough Law, we are dedicated to keeping you up to date on regulatory changes that have the potential to impact your estate plan. In 2024, the federal estate tax limit and the gift tax limit will be changing. Here’s what you need to know about these changes.

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 do estate and gift taxes 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). This is known as the “gift tax exclusion amount.” 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 tax.

The federal gift tax generally applies to the transfer of property (including money) from one person to another if nothing, or something of lesser value, is received in return. The tax is paid by the person giving the gift—not by the recipient. The federal gift tax rates are relatively high. They start at 18% and go all the way up to 40%.

How is the value of property measured for gift tax purposes?

For gift tax purposes, the value is determined by the property’s fair market value (FMV) on the date the gift is made. The IRS defines FMV as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”

Is it possible to avoid the federal gift tax?

Fortunately, the answer is yes. Gifts of property with a Fair Market Value below the annual gift tax exclusion limit are not subject to the federal gift tax. Any gifts exceeding the annual gift tax exclusion must be reported to the IRS on a federal gift tax return (Form 709). However, that doesn’t necessarily mean you will owe any tax for those gifts. The federal tax on gifts only applies if the lifetime exemption amount is surpassed.

There are a few other exemptions. For example, the gift tax doesn’t apply to tuition paid directly to an educational institution for someone else, medical expenses paid directly to a doctor or other medical care provider for someone else, gifts to a spouse who is a U.S. citizen, gifts to political organizations, gifts to charities, and gifts to certain tax-exempt civic or business leagues, chambers of commerce, recreational clubs, and similar organizations. Because there are several special rules and requirements for these exceptions, if you’re planning to make one of these types of gifts, it’s best to speak with a qualified tax advisor first.

How much money can people exclude from estate and gift taxes? What is the gift tax exclusion limit?

Under current tax law, 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 table below summarizes the exclusion amounts for each type of tax.

Year	Estate Tax Lifetime Exemption	Gift Tax & GST Tax Annual Exclusion per Donee
2023	$12,920,000	$17,000
2024	$13,610,000	$18,000
2025	$14,160,000 (estimated)	$19,000 (estimated)
2026	$5,000,000	TBD

(The figures adjust annually on January 1st and are adjusted for inflation, so based on current data, these are reasonable estimates.)

When do you pay gift tax?

You don’t actually pay any gift tax until the cumulative gifts you make over your lifetime exceed the federal estate tax limit (which will be more than $13 million per person next year, but will sunset to $5 million per person in 2026). You just have to file a gift tax return if you gift in excess of $18,000 to a single donee because the IRS wants to keep track of the gifts you make over your lifetime, in case you exceed the estate tax limit, at which point the gifts would start to be taxed.

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.

Questions? Do you need help figuring out how these changes will impact your specific situation? Kimbrough Law is here for you. Just give our office a call at 706.850.6910.