How will the higher annual exclusion from gift tax in 2025 impact taxpayers?

With the annual gift tax exclusion limit set to increase in 2025 and the lifetime gift and estate tax exclusion limit scheduled to decrease in 2026, 2025 could be the best year in the foreseeable future to make estate transfers and gifts from a tax perspective.

This temporary alignment of favorable tax conditions has created a fast-closing window of opportunity for tax savings. Leveraging these exemption limits enables you to transfer more wealth tax-free.

In this article, we will explore how changes in annual and lifetime gift and estate tax exemption limits may affect taxpayers and how they can maximize their benefits. Read on to learn more!

2025 Gift Tax Annual Exclusion and Strategies for Effective Gifting?

In 2025, the annual gift tax exclusion limit will increase from $18,000 to $19,000. Since 2021, the annual gift tax exclusion has been increasing steadily by $1,000 every year to adjust for inflation. This is a per-person, per-beneficiary limit.?

Once this annual gift tax exclusion limit is exhausted, you can reduce your beneficiary’s tax liability by utilizing your lifetime gift and estate tax exclusion limit which will be $13.99 million individually and $27.98 million for married couples in 2025. However, since many of the provisions of the Tax Cuts and Jobs Act of 2017 will expire in 2026, the lifetime gift and estate tax exclusion limit may fall to $7 million.

So, a married couple, whose lifetime gift and estate tax exclusion limits are completely untouched, can gift $28.02 million to each of their beneficiaries in 2025 without creating tax liabilities for the beneficiaries.

Once the exemption limits are exhausted, gifts and estate transfers are taxed as per the following table.

These tax rates are applicable just like income tax rates. 18% tax is applicable on the first $10,000 exceeding the exemption limits, after which, 20% tax is applicable on the next $10,000, and so on.

Let us understand this with an example

John and Sara Smith are Nicholas's parents and have an estate worth $62 million. They would like to gift $31 million or half the estate to Nicholas. Let us compare their tax liabilities when the transfer is made in 2025 and when it is made in 2026. First, we will calculate the amount exceeding the total gift and estate tax exclusion limit.

Now, let us calculate the tax liabilities in both years.

Thus, we see that making the transfer in 2025 instead of 2026 saves $5,592,000 in taxes for Nicholas Smith.

Gift More, Tax Less in 2025!

The annual gift tax exclusion limit will increase to $19,000 in 2025. In the same year, the lifetime gift and estate tax exemption limit will increase to $13.99 million. However, the latter is expected to drop as low as $7 million in 2026.

Hence, accelerating your estate planning and making a transfer no later than 31st December 2025 is key to minimizing tax liabilities.