In the United States, the federal government charges a tax when individuals give money or other items of value to others, whether during the givers’ lifetime or upon their death. These levies are gift and estate taxes, and sometimes inheritance taxes, and in some cases, they can be significant. While gifts to political or charitable organizations are not included in funds subject to gift taxes, many gifts given to other people can be. Here are some of the rules:
- You can give your spouse an unlimited amount of money (hence the term "unlimited marital deduction).
- You can give up to $16,000 annually to anyone else. Your spouse can also give that same person $16,000 annually without you as a couple needing to file a gift tax return. This amount is indexed for inflation so that it will increase periodically.
- You can pay medical or tuition expenses for another person without triggering the gift tax. These amounts are not limited, but the giver must make the payments directly to the educational institution or medical care provider, not to the recipient of the services.
Is The Estate Tax Different?
The IRS defines an estate tax as a tax on your right to transfer property at your death. It includes money, real estate, stocks, trusts, businesses, and any other assets. The passage of the Tax Cuts and Jobs Act increased the exclusion from the estate tax from $5.4 million to $11.4 million ($12.06 million in 2022), which significantly decreased the number of estates subject to its imposition. However, the expanded amount is not permanent—it is due to expire in 2026 and revert to the previous threshold unless Congress acts to extend the provisions.
As with the gift tax, a spouse is exempt from estate tax imposition. Any asset that transfers to the surviving spouse becomes part of that person’s estate unless that person spends or gives it away. If that surviving spouse remarries, those same assets can again be transferred to the new spouse without incurring any gift or estate taxes.
What About The Unified Credit?
If a taxpayer gives money or property to someone other than a spouse in an amount that would trigger the gift return, they don't necessarily have to pay taxes on the amount. For example, you can give your child $30,000 and file the return disclosing the amount but subtract it from your unified credit—which is the total available as the estate tax credit, minus any previous exemptions used. In that sense, the exemption can be considered a lifetime allowance. (Remember, the amount may be reduced in 2026 if Congress does not extend the current amount.)
Are All Spouses Entitled to The Marital Deduction?
Only U.S. citizens are entitled to the unlimited marital deduction from gift and estate taxes. However, if a taxpayer wants to make an accommodation for a non-citizen spouse, they can set up a qualified domestic trust, allowing deferral of applicable estate taxes.