Around late October or early November, the IRS announces annual inflation adjustments for the following tax year. On October 22, 2024, the IRS published Rev. Proc. 2024-40, which provides these adjustments and changes to other tax provisions for 2025. In this blog, I will reiterate how the basic and annual gift and estate tax exclusions operate and provide the increases for 2025.
Basic Exclusion
The basic exclusion for decedents who die in 2025 will be $13,990,000, up from the 2024 basic exclusion amount of $13,610,000. The basic exclusion serves as the unified credit against gift and estate tax for an individual. By using portability or a credit shelter trust, married couples can typically take advantage of the unlimited marital deduction when the first spouse passes away, allowing the surviving spouse to inherit the unused basic exclusion of the deceased spouse. Consequently, if both spouses pass away under the same basic exclusion amount, the surviving spouse often has an applicable exclusion equal to two times the basic exclusion, totaling $27,980,000 if both spouses die in 2025.
However, with 2025 fast approaching, it is essential to remember that the basic exclusion is currently under a temporary increase of 200% as set forth in the 2017 Tax Cuts and Jobs Act, which is scheduled to sunset at the end of 2025 unless Congress takes action. This means that despite the annual inflation adjustment, the basic exclusion for 2026 will potentially drop to approximately $7,000,00
Annual Exclusion
The annual exclusion under Internal Revenue Code Section 2503(b) is the amount that can be given to a single recipient without triggering a reporting requirement on a Form 709 gift tax return. For 2025, this amount will be $19,000, an increase from $18,000 in 2024. Gifts below the annual exclusion amount are exempt from gift tax and do not reduce a person’s available basic or applicable exclusion. Additionally, since Section 2503(b) does not restrict the number of recipients, the annual exclusion allows a person to remove significantly more from their taxable estate than one might expect. For instance, a person could make a gift of $19,000 to each of their five children and twelve grandchildren in 2025, removing a total of $323,000 from their taxable estate without using any of their basic or applicable exclusion.
It is also important to note that gifts of future interest are not eligible for the annual exclusion, and only gifts to certain trusts qualify. However, gifts to UTMA accounts, 529 plans, and ABLE accounts are eligible for the annual exclusion. Finally, under Internal Revenue Code Section 2503(e), direct payments for qualified medical and educational expenses are exempt from gift tax, regardless of the amount.
A full summary of the changes and a link to Rev. Proc. 2024-40 can be found here: IRS Releases Tax Inflation Adjustments for Tax Year 2025.