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.