Revised annual gift tax and estate tax exclusions for 2024 have been announced by the Internal Revenue Service (IRS).

Gift Tax Exclusion for 2024

The federal government taxes gift givers, that is, donors, on their gifts. The recipient of a gift does not owe income tax. But the donor pays a gift tax on that portion of a gift that exceeds an annual exclusion. Starting January 1, 2024, the exclusion rises from $17,000 to $18,000. This annual exclusion is indexed for inflation and typically goes up every year. The annual exclusion is limited to $18,000 per person per year. These gifts can include cash as well as other types of property. There is no limit as to how many people you can gift $18,000 to in any given year and still qualify for the annual exclusion.

A married couple can double this amount and gift individuals $36,000 apiece in 2024. This is called “gift-splitting” and, although no tax is generated, these married couple gifts must be reported on a federal gift tax return. But annual exclusion gifts by an individual need not be reported. Moreover, even if you gift more than $18,000 to someone in 2024, you will not have to pay a gift tax unless you have used up your lifetime federal gift and estate tax exemption, discussed below.

Federal Gift and Estate Tax Exemption for 2024

Over the course of your lifetime, you can give away cash or other property in excess of annual exclusion gifts, up to a specified maximum, before first having to pay gift tax. This lifetime exemption is indexed for inflation and usually rises each year. In 2024 it will increase to $13.61 million (up from $12.92 million in 2023). For couples, this exemption will equal $27.22 million.

In addition to taxing gifts, federal law also imposes a tax on the value of one’s estate at death. This federal estate tax has the same $13.61 million lifetime exemption as applicable to gifts. But it is one exemption shared for both gift tax and estate tax. In other words, the federal estate tax lifetime exemption is reduced to the extent used up during your lifetime to offset gift tax.

State Death Taxes

Today, heirs of only a small fraction of the most affluent Americans need worry about the impact of the federal estate tax (although, as noted below, these exemptions are scheduled to be drastically cut in the near future). But State estate and inheritance taxes are a different story; those vary depending on where you live. Pennsylvania imposes an inheritance tax on anyone, no matter where you live, who inherits from a dead Pennsylvanian. There is no exclusionary threshold. An inheritance tax is different from an estate tax in that the tax applies to heirs rather than being taken directly from the estate. But the effect on hers is essentially the same. Both are death taxes.

Imagine Margaret, a successful, single business owner with a total taxable estate worth $16 million. As a wealthy individual, Margaret would likely want to consider how federal estate taxes could affect her heirs. If she were to pass away in 2024, her $16 million estate would exceed the $13.61 million threshold and owe the IRS a federal estate tax. The tax rate applicable to gifts and to estates once the lifetime exemption is exceeded kicks in at a whopping 40%! Pennsylvania inheritance tax would also be significant, most likely, in her case, 15% of her entire estate, after deductions, likely in the range of $2.2 – $2.5 million!

Exemptions are Scheduled to be cut on January 1, 2026

It’s important to note that this high lifetime gift and estate tax exemption of $13.61 million is currently on track to decrease drastically at the end of 2025, to about $6 million. Consequently, notes George Vasiliadis, an attorney with the law firm of Vasiliadis Pappas Associates, “many persons not currently at risk for incurring federal gift and estate taxes will be caught in this tax trap unless they act in advance to utilize the currently higher exemption before it is eliminated.”

Prudent estate and retirement planning should include a personalized analysis as to how federal and State death taxes may impact your estate and measures to take now to protect you and your family. The lawyers at Vasiliadis Pappas can help, contact us today!