Annual Exclusion Gifts: What You Need to Know for 2023 and 2024

As we head into the last quarter of the year, many clients are thinking about making gifts to their family members. It can also be a good time to start planning for early 2024 gifts.

The federal gift tax annual exclusion allows an individual to gift a certain amount to a recipient each year without using any of their lifetime exemption amount. For 2023, the federal gift tax annual exclusion amount is $17,000, or $34,000 for a married couple choosing to split gifts. For 2024, the annual exclusion amount is estimated to increase to $18,000, or $36,000 for a married couple choosing to split gifts. For example, it is expected that a married couple with four children would be able to gift $144,000 ($36,000 to each child) in 2024 without using either of their lifetime estate and gift tax exemption amounts.

It is often advisable to make gifts larger than the annual exclusion because lifetime gifts completely avoid state estate tax at death in Washington and Oregon, and there is no estate or gift tax in Idaho. For gifts over and above the annual exclusion amount, every US citizen and resident has a lifetime federal transfer tax exemption. The exemption is the amount of wealth a person can shelter from federal estate tax on transfers at the time of death or during lifetime. In 2023, this amount is $12,920,000 for each taxpayer, or $25,840,000 for a married couple. Due to inflation, on January 1, 2024, the federal estate and gift tax exemption amount is estimated to increase to $13,610,000, or $27,220,000 for a married couple, meaning that each taxpayer may be able to transfer an additional $690,000 free of transfer tax liability beginning next year.

It is important to note, however, that the current exemption amounts were put in place in 2017 and are currently scheduled to sunset at the end of 2025. If no legislative action is taken by Congress, the exemption amount will be reduced to $5,000,000 per taxpayer, or $10,000,000 for a married couple, indexed for inflation. While the current exemption amount has been adjusted for inflation using the Chained Consumer Price Index for all Urban Consumers (C-CPI-U) data reported from September 2022 to August 2023 by the Bureau of Labor Statistics, if we revert to the $5,000,000 amount, it will be adjusted using the Consumer Price Index for All Urban Consumers (CPI-U), which is a slower growing index. Currently, if no tax law changes are made before January 1, 2026, the federal estate and gift tax exemption amount will likely be approximately $6,800,000 per person, or $13,600,000 for a married couple.

As stated above, larger gifts are often advisable from a tax perspective because they will avoid Oregon and Washington estate tax and will shift any post-gift appreciation to the next generation for federal estate and gift tax purposes. Large gifts may also lock or grandfather in the use of the higher estate and gift tax exemption before it decreases. While gifts over the annual exclusion require the filing of a gift tax return, they do not result in gift tax being paid by the donor (assuming the gifts are under the limits described above) and do not require tax reporting by the recipient when received.

Attention should be paid to the basis of the assets to be gifted. When you make a gift of high basis assets (or cash), there will be little or no capital gain when the assets are sold. But if you gift assets that have a low basis, it is good to be aware that your recipient will take your basis in these assets. While this may not be relevant if the assets are unlikely to be sold, if the recipient plans to sell, the capital gains tax paid after the sale may be greater than the Washington or Oregon estate tax savings.

In light of this potentially time-limited opportunity, individuals and families should work with their trusted advisors to determine whether any 2023 gifting, additional gifting in 2024, or making a large gift in 2024 would be advantageous for their situation.