Gift and Estate Tax Refresher

The IRS places limits on how much you can gift to others—whether cash, property, or other assets—without incurring gift tax. These rules are in place to prevent individuals from bypassing estate taxes by giving away large portions of their estate before death. For families who own closely held businesses, the estate tax can be especially burdensome, potentially forcing the sale of a family business just to cover the tax bill. That’s why proactive estate planning is so critical, especially for high-net-worth individuals.

Gift and Estate Tax Exclusions: Annual and Lifetime

The current tax code includes two key exclusions that can help reduce or eliminate gift and estate taxes: the annual gift tax exclusion and the lifetime gift and estate tax exemption. Because gift and estate taxes are unified, gifts that exceed the annual exclusion reduce your lifetime exemption amount.

2025 Annual Gift Tax Exclusion

For 2025, the annual gift tax exclusion has increased to $19,000 per recipient. This means you can give up to $19,000 to as many people as you’d like—friends, family, or anyone else—without triggering any gift tax or filing requirements.

If a gift to a single person exceeds $19,000 in 2025, you’ll need to file Form 709 (Gift Tax Return) to report the excess. While filing is required, you still won’t owe any tax unless your cumulative lifetime gifts surpass the lifetime exemption.

Married couples can double their giving power. Each spouse can gift $19,000 to the same person—meaning a couple can jointly gift $38,000 per recipient per year without tax consequences.

Example: If you and your spouse have four children and each child is married, you can jointly gift $38,000 per child and $38,000 per child’s spouse. That’s $76,000 per couple, or $304,000 total, without touching your lifetime exclusion or triggering a gift tax return.

Gifts Counted Toward the Limit

All gifts to the same person in a calendar year count toward the $19,000 annual limit. For instance, if you give your daughter a $19,000 check in January and later pay for a vacation in her name, the additional amount would be over the limit, and you'd need to file Form 709 to report the gift.

Medical and Tuition Gifts: Extra Exclusions

Some gifts are excluded altogether from the annual and lifetime limits—as long as they’re made directly to the institution:
- Tuition paid directly to a school (elementary, secondary, or college) does not count against your gift limits.
- Medical expenses paid directly to the provider or institution also qualify for the exclusion.

Important: Reimbursing someone for those expenses doesn’t count. Payments must be made directly to the provider.

2025 Lifetime Gift and Estate Tax Exclusion

The lifetime exemption for combined gifts and estates is now $13.99 million per person in 2025. This represents the total amount you can transfer, during life or at death, before any estate or gift tax is due.

To give some perspective: In 2017, before the 2018 tax overhaul, the exemption was just $5.49 million. The current exemption is indexed for inflation, but unless Congress acts, it's set to drop back to 2017 levels (adjusted for inflation) in 2026, which could cut the exemption roughly in half—to around $6–7 million per person.

Portability Between Spouses

When one spouse dies, their unused lifetime exemption doesn’t automatically carry over. But the surviving spouse can elect portability—transferring any unused exemption to themselves—by filing Form 706 (Estate Tax Return) for the deceased spouse. This must be done even if the estate wouldn’t otherwise require a return.

Filing this form can be complicated and time-consuming, but it’s often worth it. With exemption amounts potentially decreasing in 2026, preserving that extra exclusion could save the family millions down the road.

529 Plans and Accelerated Gifting

Qualified Tuition Programs (529 plans) are another powerful estate planning tool. Contributions to these plans are considered gifts and qualify for the annual exclusion, but there’s a special rule that allows for superfunding: You can contribute five times the annual exclusion in one year—up to $95,000 in 2025—and treat it as if it were spread over five years.

This strategy is often used by grandparents or parents who want to jumpstart a child’s education savings while removing a sizable amount from their taxable estate.

Tax Basis Rules for Gifts

When you give appreciated assets (like stocks or real estate), the recipient (the "donee") inherits your original cost basis. This matters when they sell the asset, as their taxable gain is calculated from your original purchase price—not the value at the time of the gift.

Example: Let’s say you give your daughter stock worth $25,000 in 2025, which you originally bought for $6,000. Since the gift exceeds the $19,000 annual exclusion, you’ll need to file Form 709 and reduce your lifetime exemption by $6,000. When your daughter sells the stock, her capital gain will be based on your original $6,000 basis—not the $25,000 value at the time of the gift.

Now consider the alternative: If she had inherited the stock after your death, her basis would “step up” to the fair market value on the date of death—potentially eliminating any capital gain altogether if she sold immediately.

Planning Ahead

These gifting strategies can be powerful tools to reduce the taxable value of your estate and help your family, but the rules are complex and subject to change. The current high lifetime exemption won’t last forever, so 2025 could be a critical year for making large gifts or updating your estate plan.

Need help navigating the rules? Reach out to our office at mlauber@hhmcpas.com for personalized guidance tailored to your situation.

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