Who’s Penalized If You Receive Or Give a Gift in Excess of $18,000?

So the present interest annual exclusion (which for 2024 was increased from $17k to $18k) is the amount of money or assets that you can give to another each year without incurring gift tax consequences or affecting your estate tax exclusion amount (which for people who die in 2024 is $13.61 million).

Let me give you an example: Let’s say during the calendar year 2024, Dad wants to help his daughter make a down payment on her home she wants to buy and Dad writes a check to Daughter for $118,000. Because the gift to daughter was in excess of $18,000, Dad made what we’ll call a taxable gift. So who owes tax? No one.

No one owes income tax because a gift is not taxable income to the person who receives the gift, and no gift tax is due because Dad, by making a taxable gift of $100,000 ($118k minus the $18k annual exclusion amount) Dad merely used, during his lifetime, $100k of his $13.61m estate tax exclusion amount. So not too big a deal other than Dad has a requirement to report on IRS Form 709 (the federal gift tax return) that he used some of his estate tax exemption amount.

Three extra points worth mentioning while we are discussing gifting are:

1. In addition to the $18,000 you can give to people each year, you can also pay their tuition and their medical expenses, as long as you make those payments directly to the educational institution or the healthcare provider.
2. If you want your gift to, for example, be put in a trust for your grandchild or some other donee, you must give that donee a present interest, or a right to take and have control of the gift, also called a Crummey power, prior to the gift being locked up in the trust, in order to take advantage of the $18,000 present interest annual exclusion.
3. And finally, just for fun, a married couple with ten descendants (perhaps three children and seven grandchildren) can, if they want to and if they can financially swing it, remove $720,000 of value from their estate each year, ultimately preventing loads of assets from being subject to the 40% estate tax when they die.? Follow for more estate planning tips.

Here's a video I made providing more detail regarding the present interest annual exclusion.