Florida Elder Law & Estate Planning Blog


Federal Estate Tax Exemption, Annual Exclusion Increase in 2025

tax money

The year 2025 has brought changes to the unified gift and estate tax exemption, and the annual gift tax exclusion.

Federal Estate Tax Exemption

The federal estate tax is levied on gross taxable estates. A taxable estate includes trust assets, assets held in the decedent’s name, jointly held property, accounts designating a beneficiary, life insurance, annuities, etc. Note that this is a federal tax. Florida does not have a state estate tax.

Wealthy families will be happy to know that effective January 1, 2025, the amount of money an individual can give away to heirs estate tax-free, in life or in death, increased to $13.99 million (up from $13.61 million). Married couples can double that amount. Only estates in excess of that amount are taxed.

Next year, 2026, the lifetime gift and estate tax exemption is scheduled to revert to the level it was prior to the 2017 Tax Cut and Jobs Act, adjusted for inflation. That will likely put it somewhere in the $7 million range. However, with Republicans now in control of Congress, many experts believe that today’s generous exemption will not sunset. They predict that Congress will not only extend this year’s exemption, but increase it. A New York Times article of December 5, 2024, “A Broken System,” notes that the incoming Senate majority leader, John Thune, has been fighting for three decades to eliminate the estate tax entirely.

In reality, very few Americans are impacted by estate tax. The IRS reports that less than 1% of estates owed any tax in 2019. For now, the estate tax is not something that most of our clients, or indeed most Americans, need worry about. But if you are someone whose estate would be impacted,  strategies are available that can help you pass as much tax-free money as possible to your heirs. One of those strategies is taking advantage of the annual gift tax exclusion. We explain the exclusion below.

 

The Annual Gift Tax Exclusion

Beginning in 2025, the annual exclusion rose to $19,000 (up from $18,000). The annual exclusion is the amount of money you may give to as many individuals as you wish without it being deducted from your lifetime estate tax exemption (as noted above, $13.99 million beginning in 2025). Married couples may double that amount.

By way of example: If you have three children and you are married, you and your spouse can give each child $19,000 in the year 2025, for a total of $38,000 to each child, or $114,000 in total. You will need to file a gift tax return (709) only if your gift to any one individual exceeds $19,000.  The amount in excess of the $19,000 will be deducted from whatever remains of your lifetime exemption. But unless you have exhausted your $13.99 million exemption, you will owe no tax. And recipients of your gift have no tax liability, no matter the size of the gift.

Additionally, you are not limited to $19,000 if you are paying an educational institution or medical provider directly. For example, you may pay for a grandchild’s college tuition of $80,000 each year and not file a gift tax return, and not have your lifetime exemption reduced, if you make the payment directly to the school.

 

Surviving Spouses May Elect Portability

Surviving spouses have the right to transfer to themselves any unused portion of their deceased spouse’s estate tax exemption, thus adding to their own exemption and allowing more money to be passed to heirs tax-free. This feature of the tax code is called “portability.” To take advantage of portability, the personal representative (executor) or trustee of the decedent’s estate must file a federal estate tax return (Form 706) and take the portability election. This must be done within nine months of the spouse’s death, although a six-month extension is available.

In certain situations, it may be wise for a surviving spouse to elect portability even if the deceased spouse’s estate is not taxable at the time of death. For example, if the survivor is significantly younger than the decedent, there are many years ahead in which the survivor’s estate could conceivably grow to a taxable level. Survivors should also be mindful that tax laws are always changing, and in years to come, it is possible that the estate tax exemption will be less generous than it was when the spouse passed away.

 

Other Considerations When Making Gifts

Of course, there may be additional tax implications to any gifts you make. These should be discussed with your financial advisor. Here are a few possible tax ramifications: 

  • If you make a gift by withdrawing money out of your 401K or traditional (not Roth) IRA, you will have income tax on the withdrawal. The same goes for tax-deferred annuiities. 

 

  • If you transfer capitally appreciated stock or real estate, the recipient will retain your original basis for capital gains purposes when he/she sells it. However, if you pass it to the recipient at your death, the recipient’s basis will be the value at the date of death, not your date of purchase (“step up” in basis), thus saving on capital gains tax. 

 

  • Gifting to children or grandchildren may impact on the recipients or the recipient’s child by restricting or eliminating the ability to obtain federal college aid or other scholarships or loans.  

 

Our attorneys will continue monitoring estate tax developments and continue to provide guidance to our clients. At this point, few clients are impacted. However, the estate tax has been a political football for years, and no one can be certain about what will occur in the future. We will report any changes on our website, on this blog, and in our monthly e-newsletter