The Internal Revenue Service (IRS) recently announced inflation adjustments to the annual gift tax exclusion and the federal estate tax exemption, effective January 1, 2025. These changes present significant planning opportunities now, especially as the exemption amounts are set to be halved in 2026. Individuals should act quickly to:
1. Maximize tax-free gifting under the increased 2025 annual gift tax exclusion.
2. Utilize the elevated federal estate tax exemption to shield more assets from taxation.
3. Implement comprehensive estate plans to secure long-term benefits for heirs.
For 2025, the annual gift tax exclusion will rise to $19,000, allowing taxpayers to gift up to this amount per recipient each year without it counting against the lifetime estate and gift tax exemption. This exclusion applies to an unlimited number of recipients, enabling taxpayers to give multiple $19,000 gifts without reducing their lifetime exemption. Married couples can double this amount, gifting $38,000 per recipient annually without impacting their exemption.
The federal estate tax exemption will also increase from $13,610,000 to $13,990,000 in 2025. This higher threshold permits estates valued below this limit to transfer assets tax-free upon death. Married couples can effectively shield nearly $28 million from federal estate tax through
this exemption.
However, the federal gift and estate tax exemptions are linked: any use of the lifetime gift tax exemption reduces the estate tax exemption available at death. For instance, if a taxpayer gifts $1 million over the annual exclusion during their lifetime, that amount is deducted from the estate exemption, lowering the estate’s non-taxable threshold.
Critically, these favorable exemptions are temporary. Under current tax law, the estate and gift tax exemption will be halved starting January 1, 2026, reverting to pre-2018 levels adjusted for inflation—estimated to be around $6 million.
The pending reduction makes 2025 a crucial year for strategic tax planning. By utilizing the increased exemption levels, taxpayers can reduce future estate tax liabilities, secure substantial benefits for their heirs, and potentially preserve generational wealth. Don’t wait—plan now to make the most of these opportunities.
