The current Unified Estate Tax and Gift Tax Exemption allows you to pass $12.92 million, tax-free. This can include tax-free gifts you make during your lifetime, or bequests made after your death, or a combination of the two. A married couple may pass twice that amount. Additionally, a surviving spouse may claim, in addition to his/her own exemption, whatever portion of the deceased spouse’s exemption was unused.
The vast majority of Americans have no federal estate tax exposure – at least, not at the moment. That is likely to change in 2026. On January 1, 2026 the lifetime estate and gift tax exemption will be cut by about half, to approximately $7 million, unless Congress acts. Inevitably, many Americans will find that their estates have become subject to federal estate taxes.
If you think your estate will fall into taxable territory in 2026, now is a good time to start reducing the size of your estate and thus, your estate tax liability. There are many approaches to doing that, including charitable trusts and other highly sophisticated approaches. But certainly one of the easiest ways to reduce or eliminate estate taxes and pass more tax-free money to your loved ones is to make tax-free gifts during your lifetime. Let’s examine various ways to make such gifts.
Make Gifts To Family, Friends
Under the current law, any gift you make of $17,000 or less does not reduce your lifetime exemption. It is not subject to gift tax, and you need not report the gift to the IRS. You may give $17,000 to as many recipients as you wish each year. Married couples may double that amount. For example, if you are married and have two children, both you and your spouse may gave each child $17,000 per year, for a total of $68,000.
Gifts may be in the form of cash or property. Obviously most people make such gifts to children and grandchildren, but in fact there is no legal requirement that the recipient be related to you.
If any gift exceeds the $17,000 threshold, you will need to complete a gift tax form, IRS Form 709. This is the form that the IRS uses to track your taxable gifts over your lifetime. However, you will actually owe tax only if and when you have used up your entire lifetime exemption.
Note that we do not yet know if the annual gift exclusion will remain at $17,000 for the year 2024. Whether it increases to $18,000 (increases are always in $1,000 increments) will depend on inflation.
Pay For Tuition
The IRS allows you to pay someone’s tuition bill in any amount, without depleting any of your $17,000 annual gift exemption There are some important strings attached, however:
- Payment must be to an accredited educational institution.
- Payment must be made directly to the institution. For example, you cannot just write a check payable to your grandchild and advise him to use it for tuition.
- Only tuition is covered. Other educational expenses such as room and board and books are not eligible.
Pay for Medical Expenses
You may also pay for anyone’s medical expenses, in any amount, without using up any of your $17,000 annual gift exemption. The caveats:
- Payment must be made directly to the recipient’s medical provider.
- You may cover only what are considered deductible medical expenses related to a diagnosis, a cure, or mitigation, treatment or prevention of a disease. Thus, allowable expenses would include physicians’ and hospital bills, dentists, medical insurance providers. You could even pay for transportation for someone to and from treatment.
Make Gifts to Charities
As with tuition and medical expenses, you may gift an unlimited amount to a qualified charity without using up any of your $17,000 annual gift tax exemption. Here are some of the applicable rules:
- The charity must be considered a 501 (c) (3) tax-exempt charity as defined by the Internal Revenue Service. Not every non-profit qualifies, so be sure to do your homework and check with the IRS.
- Unlike gifts made to individuals or for educational or medical gifts, your gifts to charitable organizations may also be income tax-deductible, if you itemize your deductions.
Contribute to a 529 Plan
A 529 Plan, also known as a Qualified Tuition Plan, allows you to contribute to a child’s education savings. The funds in a 529 may pay for K-12 education as well as for college.
In addition to making an annual $17,000 gift-tax free contribution, the IRS also allows you to “front load” your contribution for five years. In other words, you can contribute $85,000 ($17,000 x 5) to a child’s 529 without paying any gift tax. As soon as the contribution is made, the money is removed from your estate, and your $17,000 annual exemption is used up for five years.
Be sure to talk with your estate planning attorney, accountant or financial planner about these techniques. If you need a referral to a financial professional, call The Karp Law Firm and we can provide you with the names of several individuals we know and trust. Reach us at (561) 625-1100 or email KLF@karplaw.com.