Gifting and the Annual Exclusion
Lifetime gifts are a wonderful way to bless your loved ones and make a meaningful impact on their lives. Whether it’s helping a child with educational expenses, supporting a family member in need, or simply sharing your wealth to enhance their financial security, gifting allows you to express your generosity while witnessing the benefits of your support firsthand.
Beyond the emotional rewards, thoughtful lifetime gifting can also provide financial advantages by reducing the size of your taxable estate and taking advantage of tax-free gifting opportunities.
With proper planning and an understanding of the applicable tax rules, you can ensure your gifts provide the greatest benefit to both you and your recipients.
The Government Taxes Gifts?
It’s funny how the government just can’t resist getting involved in everything—even generosity! You’d think giving your hard-earned money to loved ones – which has already been taxed – would be a no-strings-attached kind of deal, but nope—Uncle Sam wants a say in that too. That’s right, the IRS keeps a close eye on gifts, and if you go over their annual “free pass” amount, they expect you to report it, and maybe even pay some taxes. So, whether you’re handing over cash to your kids or surprising your niece with a down payment on a house, remember—big brother is watching your gift wrap!
Fortunately, there are a few breaks that prevent taxes on most gifts.
What Counts as a Gift
When it comes to what is considered a gift for tax purposes, the distinction often depends on the nature of the expense and the recipient. Generally, providing financial support for a dependent child’s necessary expenses, such as food, housing, medical care, and education, is not considered a taxable gift, as parents are legally obligated to provide for their minor children. However, paying for an adult child’s wedding, covering their rent, or gifting them cash are all considered gifts and may be subject to gift tax rules. In addition, giving money outright to anyone is always classified as a gift, regardless of intent or relationship.
Paying expenses directly to a third party, such as covering medical bills or tuition for someone else, is also considered a gift, unless it qualifies for specific exclusions under IRS rules (e.g., payments made directly to medical providers or educational institutions). Understanding these distinctions helps ensure compliance with tax regulations and proper financial planning.
The Annual Gift Exclusion
Most gifts that are given fall under the “Annual Gift Exclusion” rule. Essentially, the Annual Gift Exclusion allows any one person to gift up to a certain amount per year without triggering tax implications. In 2025, this amount is $19,000 per person but it does go up with inflation annually (check out 2025 Tax Resources – Gilbert Wealth for the latest numbers).
For example, if you have 5 people you would like to gift to (children, grandchildren, random strangers, etc), you can each of them $19,000 or a total of $95,000 per year!
However, what if you want to gift more than the annual Exclusion?
Lifetime Gift Exclusion
When you gift more than the annual exclusion, the IRS provides a lifetime gift and estate tax exemption, which is the total amount you can give away over your lifetime without incurring gift tax. For 2024, this amount is $13.61 million per individual ($27.22 million for married couples).
- Any gifts exceeding the annual exclusion will count toward this lifetime exemption.
- The lifetime exemption is unified with the estate tax, meaning any portion used for gifting reduces the amount that can be passed tax-free upon death.
This provision will make 99.9% of gifts from most people a non-taxable event. But while these gifts are non-taxable, you will now be required to file a tax form called Form 709 United States Gift Tax Return.
IRS Form 709
Form 709 is effectively a way to track what level of gifting you made above the annual exclusion over your lifetime. When you die, your executor will need this information to determine whether you will owe estate taxes.
What is Gift Splitting?
One common way to boost the gifting to someone above the annual exclusion is to use “Gift Splitting” which is where a couple will split a gift between their respective annual exclusions. Remember the rule is that the annual exclusion applies per person, per donee. So spouse 1 has a separate annual exclusion than spouse 2.
For example, if you wanted to gift a single person $30,000. If the gift comes from just one person, it will be $11,000 over the annual exclusion. If the gift comes from two people, each with a $19,000 exclusion, then it will be under their annual exclusions.
There are two important considerations here to splitting a gift:
- If the gift is coming from a joint account, the gift is considered to be split between the owners automatically. Generally, this is the easiest method.
- If the gift is coming from an individually owned account but gift splitting is desired, you will need to file Form 709 for the non-owner spouse to elect gift splitting.
Gifts With Special Treatment
Gifts to Spouses: Gifts to a U.S. citizen spouse are unlimited and do not require reporting.
Preferred Family Loans: Official loans to family members are not considered gifts. However, if you charge a lower rate than the IRS prescribes, the reduced interest payments could be considered gifts.
529 Contributions: 529 Plan contributions have a special 5-year rule allowing you to pull forward 5 years of the annual exclusion to fund a 529.
Medical Expenses: Payments made directly to a healthcare provider for someone’s medical expenses are excluded.
Direct Education Expenses: If you directly pay tuition to an educational institution (not to the individual), it does not count as a taxable gift.
Others
Gifts of Future Interest: If a gift to someone has restrictions that don’t allow that gift to be used right away (as what can happen when trusts are involved), the gift implications can become more complicated.