Legal Definitions - annual exclusion amount

The annual exclusion amount is a specific dollar limit set by tax law that an individual can give as a gift to another person within a calendar year without incurring federal gift tax and without needing to report the gift to the IRS. This amount also does not reduce the giver's lifetime gift and estate tax exemption. This exclusion applies per recipient, meaning a giver can make such a tax-free gift to multiple people in the same year. Gifts can be made in the form of cash, property, or other assets.

Here are some examples to illustrate how the annual exclusion amount works:

• Example 1: Gifting to Multiple Individuals
  Sarah wants to help her three adult children financially. In a single year, she gives $18,000 to her son, $18,000 to her first daughter, and $18,000 to her second daughter. Because the annual exclusion amount (for example, $18,000 in 2024) applies per recipient, Sarah can give this amount to each of her children without having to file a gift tax return or pay any gift tax. Her lifetime exemption remains untouched.

• Example 2: Gifting Non-Cash Assets
  Mark wants to support his nephew's education. Instead of cash, he transfers shares of stock he owns, which are valued at $17,500, directly into his nephew's brokerage account. Since the value of the stock is below the annual exclusion amount, Mark does not need to report this gift to the IRS, and no gift tax is due. This demonstrates that the exclusion applies to various types of assets, not just money.

• Example 3: Joint Gifting by a Married Couple
  David and Lisa, a married couple, want to help their grandchild with a down payment on a house. Together, they gift their grandchild $36,000. Since each spouse can utilize their individual annual exclusion amount (e.g., $18,000 each), they can collectively give $36,000 to their grandchild without triggering any gift tax reporting requirements or using up their individual lifetime exemptions. They are essentially combining their individual annual exclusions for a single recipient.