As tax season 2025 approaches, it’s important to understand changes in estate and gift taxes. This year brings updates that could benefit those filing these types of taxes. Knowing the latest rules on gift and estate taxes, as well as exclusions and exemptions, can help you plan more effectively.
What Are Gift Taxes?
The gift tax is a federal tax applied when someone transfers something of value to another person without receiving equal value in return.
According to the IRS, gift tax may apply to money, property, loans with low interest, or sales priced below market value. Essentially, it is a tax on the act of giving, even if the donor does not intend it as a “gift.”
Exemptions to Gift Taxes
Certain gifts are exempt from the gift tax:
- Gifts to spouses
- Gifts to political organizations
- Annual gifts below a set limit per recipient
- Payments for someone else’s tuition or medical expenses
These exclusions allow people to give or pay for specific needs without incurring tax.
Who Pays Gift Taxes?
Usually, the person giving the gift (the donor) is responsible for paying the gift tax. Although the recipient can offer to pay, it’s advised to consult a tax professional before proceeding.
What Are Estate Taxes?
The estate tax, also known as the “death tax,” is levied on the total value of a deceased person’s assets. The IRS assesses the tax based on the “Gross Estate,” which includes all property, securities, real estate, insurance, business interests, and other items owned at the time of death.
Estate Tax Exemptions and Deductions
Only certain estates are required to file taxes. Assets passed on to spouses, qualified charities, or those covering mortgages or debts can reduce the taxable amount.
Who Pays Estate Taxes?
Estate tax is applied to estates that exceed a certain value at the time of the person’s death. In 2025, this “basic exclusion amount” is set to $13.99 million, up slightly from $13.61 million in 2024. Estates below this threshold do not have to file an estate tax return.
Upcoming Changes to Exclusions
The current exclusion limit of $13.99 million is part of the Tax Cuts and Jobs Act signed in 2017. However, this provision expires at the end of 2025, reducing the exclusion amount to around $5.49 million, adjusted for inflation.
This reduction will mean that more estates could be subject to taxation, providing funds for essential federal programs.
Understanding estate and gift taxes, including exclusions and requirements, is essential for effective financial planning. As changes are coming in 2025 that may impact estate planning strategies, especially with the lower exclusion amount, preparing in advance is crucial. Working with a tax professional can help you make the best decisions for your financial situation.
What is the gift tax rate?
Gift tax rates vary based on the value of the gift, reaching up to 40% for higher amounts.
Are there gift tax exemptions?
Yes, certain gifts, like those to spouses and qualifying charities, are exempt from gift tax.
What assets are subject to estate tax?
Estate tax applies to the total value of a person’s property, securities, real estate, and more.
Will the estate tax exemption decrease in 2026?
Yes, the exclusion will drop from $13.99 million to around $5.49 million per person.
Who is responsible for paying gift and estate taxes?
Generally, the donor pays the gift tax, while the estate pays the estate tax if applicable.
