Estate & Gift Tax: Exemptions, Rates & Planning
Navigate the federal estate and gift tax system with our guide to lifetime exemptions, annual exclusions, and strategies for efficient wealth transfer.
The federal estate and gift tax system imposes a tax on the transfer of wealth, either during your lifetime (gift tax) or at death (estate tax). These two taxes work together under a unified system with a single lifetime exemption that covers both gifts and estate transfers. For 2025, the combined lifetime exemption is $13.99 million per individual, or $27.98 million for married couples who plan together.
The estate tax applies to the total value of a deceased person assets, including real estate, investments, business interests, retirement accounts, life insurance proceeds, and personal property, minus allowable deductions like debts, funeral expenses, and charitable bequests. The gift tax applies to transfers of property during your lifetime for less than full value. Both taxes use the same graduated rate schedule, with a top rate of 40%.
The current high exemption amount is historically elevated due to the Tax Cuts and Jobs Act of 2017, which roughly doubled the exemption. This provision is set to sunset after 2025, which would reduce the exemption to approximately $7 million per person (adjusted for inflation). This pending reduction has created urgency for high-net-worth individuals to use their exemption before the potential decrease, making estate and gift tax planning especially timely.
How It Works
Each year, you can give up to $19,000 per recipient (2025 annual exclusion) without any gift tax consequences or reduction to your lifetime exemption. Married couples can give up to $38,000 per recipient by gift splitting. These annual exclusion gifts are the simplest and most common form of tax-free wealth transfer. Gifts above the annual exclusion count against your lifetime exemption.
When you make a taxable gift (above the annual exclusion), you must file Form 709 to report it. The gift is subtracted from your lifetime exemption, but no tax is owed until the exemption is fully used. At death, the estate executor files Form 706 if the gross estate plus adjusted taxable gifts exceed the exemption amount. The estate tax is calculated on the total amount exceeding the exemption at rates up to 40%.
Several strategies can reduce or eliminate estate and gift taxes. The unlimited marital deduction allows unlimited transfers between spouses who are U.S. citizens. The charitable deduction removes donated assets from the taxable estate. Irrevocable trusts, Grantor Retained Annuity Trusts (GRATs), and family limited partnerships are more advanced techniques used to transfer wealth at reduced gift tax values. Portability allows a surviving spouse to use the deceased spouse unused exemption, effectively doubling the available exemption for married couples.
Current Rates
| Bracket / Category | Rate | Applies To |
|---|---|---|
| Lifetime Exemption (Individual) | $13.99 million | Combined gift and estate tax exemption (2025) |
| Lifetime Exemption (Married Couple) | $27.98 million | With portability election (2025) |
| Annual Gift Exclusion | $19,000 per recipient | No tax or reporting required (2025) |
| Top Estate/Gift Tax Rate | 40% | Amounts exceeding the lifetime exemption |
| Generation-Skipping Transfer Tax | 40% | Transfers to grandchildren or lower generations beyond GST exemption |
Key Forms
United States Estate (and Generation-Skipping Transfer) Tax Return
United States Gift (and Generation-Skipping Transfer) Tax Return
Estate tax return for nonresident aliens
Information regarding beneficiaries acquiring property from a decedent
Deductions & Credits
Unlimited Marital Deduction
Transfers between U.S. citizen spouses are completely exempt from estate and gift tax, with no limit on the amount transferred.
Charitable Deduction
Gifts to qualified charities are deductible from the gross estate or taxable gifts without limitation, removing them from the transfer tax base.
Portability of Unused Exemption
A surviving spouse can use the deceased spouse unused exemption by filing a timely Form 706, effectively doubling the available exemption to $27.98 million.
Annual Gift Tax Exclusion
Gifts of up to $19,000 per recipient per year (2025) are excluded from taxable gifts and do not reduce your lifetime exemption.
State Death Tax Credit/Deduction
Estate taxes paid to states with their own estate or inheritance tax may be deducted on the federal estate tax return.
Filing Tips
- Take advantage of the current high exemption ($13.99 million) before it potentially drops to around $7 million after 2025.
- Use the annual exclusion ($19,000 per recipient in 2025) for regular gifts to reduce your taxable estate over time.
- File Form 706 for a deceased spouse even if no estate tax is owed to preserve unused exemption for the surviving spouse through portability.
- Consider gifting appreciating assets during your lifetime to remove future growth from your taxable estate.
- Direct payments to educational institutions for tuition or to medical providers for medical expenses are unlimited and do not count as taxable gifts.
- Work with an estate planning attorney to establish trusts and other structures well before they are needed.
Frequently Asked Questions
Do most people need to worry about estate tax?
What is the difference between estate tax and inheritance tax?
Do I need to file a gift tax return for annual exclusion gifts?
What happens to the estate tax exemption after 2025?
Can I give unlimited gifts to my spouse without tax consequences?
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