Annual Exclusion: Meaning and Special Cases

What Is an Annual Exclusion?

An annual exclusion is the amount of money that one person may transfer to another as a gift without incurring a gift tax or affecting the unified credit. This annual gift exclusion can be transferred in the form of cash or other assets. The Internal Revenue Service (IRS) announced the annual exclusion will increase to $18,000 in 2024 (up from $17,000 in 2023).

How Annual Exclusions Work

The annual exclusion applies per person, per year. If grandparents gift several thousand dollars to each of their grandchildren, each amount will be considered separately toward its own annual exclusion.

The year resets and restarts on Jan. 1. You could give a single individual $17,000 on Dec. 31, 2023, and $18,000 on Jan. 1, 2024, because this is a new year with a higher exclusion. All gifts made to the same individual count toward the exclusion.

While any gift is generally a taxable gift, exceptions do exist. For example, the following gifts are not taxable:

• Gifts that are less than the year’s annual exclusion
• Tuition or medical expenses
• Gifts to a spouse
• Gifts to a political organization

Gifts to qualifying charities are also deductible from the value of the gift(s) made. Otherwise, taxpayers cannot deduct the value of gifts they make. IRS Publication 559, Survivors, Executors, and Administrators lays out the specifics in this regard.

To be approved for an annual exclusion, taxpayers must submit copies of appraisals, copies of relevant documents regarding the transfer, and any documentation of unusual items shown on the return (such as partially gifted assets).

Special Considerations

The annual exclusion plays a key role in estate tax exemption and wealth management.

Estate Tax Exemption

The $18,000 annual exclusion means you can give $18,000 to as many people as you want. So you can give each of your five grandchildren $18,000 apiece in a given year, for a total of $90,000. Any gifts you make to a single person over $18,000 count toward your combined estate and gift tax exclusion. This is the amount you are allowed to leave in your estate or give as gifts during your life tax free.

For 2024, the lifetime gift tax exemption is $13.61 million (up from $12.92 million in 2023). This means that if you are married, you and your spouse can give away a total of $27.22 million (up from $25.84 million in 2023) before paying the gift tax.

These new exemption thresholds were established by the Tax Cuts and Jobs Act (TCJA), which expires after 2025. The TCJA more than doubled the federal estate and gift tax exemption, which was previously $5 million (adjusted annually for inflation).

Wealth Management

Annual exclusion and estate tax exemption are often considered as part of a larger wealth management plan or estate plan. A high-net-worth individual (HNWI), for example, could enlist the support of a wealth management firm or independent financial advisor to determine how best to allocate financial and other assets via gifts or in a will to avoid heavy tax penalties.

A will is a legal document that provides clear instructions on how an individual’s property and custody of minor children, if any, should be handled after death. In a will, an individual expresses their wishes and names a trustee or executor to fulfill the stated intentions. The will can also indicate whether a trust should be created after death. If a will includes instructions on gifts, this section will determine any tax liabilities for the estate or beneficiaries.

The Bottom Line

An annual exclusion is the money that one person may transfer to another as a gift without incurring a gift tax or affecting the unified credit. This annual gift exclusion can be transferred in cash or other assets.

Correction—Sept. 8, 2024: This article has been corrected to state that the Tax Cuts and Jobs Act expires after 2025, not in 2025.