US Gift Tax, changes for 2025

In 2025, the Internal Revenue Service (IRS) has adjusted the gift tax rules, reflecting annual inflation adjustments.

Annual Gift Tax Exclusion:

• 2024: Individuals can gift up to $18,000 per recipient without incurring gift tax or the need to file a gift tax return.
• 2025: This exclusion increases to $19,000 per recipient.

This means in 2025, a donor can give up to $19,000 to any number of individuals without affecting their lifetime gift tax exemption.

Lifetime Gift and Estate Tax Exemption:

• 2024: The combined lifetime exemption is $13.61 million.
• 2025: This exemption increases to $13.99 million.

Gifts exceeding the annual exclusion amount count against this lifetime exemption. Once the lifetime exemption is surpassed, additional gifts may be subject to a tax rate of up to 40%.

Gifts to Non-U.S. Citizen Spouses:

• 2024: The annual exclusion for gifts to non-citizen spouses is $185,000.
• 2025: This exclusion increases to $190,000.

This higher exclusion recognizes potential estate tax implications due to differing citizenship statuses.

Reporting Requirements:

For both years, if an individual makes a gift exceeding the annual exclusion amount to any recipient, they must file IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return, to report the gift.

U.S. Citizens Residing Abroad:

The IRS imposes gift tax based on citizenship, not residency. Therefore, U.S. citizens living overseas are subject to the same gift tax rules as those residing within the United States. Additionally, receiving substantial gifts from foreign persons may require filing Form 3520 to report these foreign gifts.

Non-Taxable Gifts:

Certain transfers are exempt from gift tax in both 2024 and 2025, including:

• Direct Payments for Medical or Educational Expenses: Payments made directly to medical or educational institutions on behalf of someone else are not considered taxable gifts.
• Gifts to Qualified Charitable Organizations: Donations to eligible charities are exempt from gift tax and may also provide income tax deductions.

Gift Tax Implications for the Recipient (2024 vs. 2025)

One of the key advantages of U.S. gift tax laws is that the gift tax is the responsibility of the giver, not the recipient. However, there are some important considerations for the recipient depending on the nature of the gift.

1. Cash Gifts

• Tax Implication: Recipients do not owe federal income tax on cash gifts, regardless of the amount. Exception: If the recipient invests the money and earns interest, dividends, or capital gains, those earnings are subject to income tax.

2. Property and Asset Gifts

• Tax Implication: No immediate tax is owed by the recipient upon receiving the gift.
• Capital Gains Considerations: If the recipient later sells an asset (stocks, real estate, etc.), capital gains tax may apply, based on the donor's original purchase price (cost basis). Example: If someone gifts a stock that was bought for $10 but is now worth $50, the recipient must pay capital gains tax on the $40 gain when selling.

3. Gifted Real Estate

• Tax Implication: No income tax is owed upon receiving gifted property.
• Capital Gains Considerations: If the recipient sells the property, they will inherit the donor’s cost basis and may owe capital gains tax on any appreciation in value.
• Potential Strategy: If the recipient inherits the property instead of receiving it as a gift, they receive a stepped-up cost basis, reducing potential capital gains taxes.

4. Gifts from Foreign Persons

• Tax Implication: U.S. recipients of large gifts from foreign individuals (over $100,000) or foreign corporations (over $18,567 in 2024; subject to inflation adjustment in 2025) must file IRS Form 3520 to report the gift.
• No tax is owed, but failure to report could result in penalties.

Key Takeaways

• Gift tax is paid by the giver, not the recipient.
• Cash gifts are tax-free for recipients, but investment earnings from the gift are taxable.
• Gifted property may have capital gains tax consequences when sold.
• Receiving foreign gifts may require reporting but generally does not trigger tax.

If someone is considering gifting large assets, it may be beneficial to discuss cost basis implications with a tax professional to minimize the recipient’s potential future tax burden.