As the holidays approach, many of us start thinking about meaningful ways to bless the lives of those we love. A wrapped present is thoughtful, but a well-planned financial gift can have an impact that lasts far beyond the season. If you’re considering making gifts this year, a little planning can help you do it in the most tax-efficient way.
What is the annual gift tax exclusion?
Gift tax rules exist to keep people from giving away their estate on the eve of death to avoid estate taxes. In practice, the rules aren’t nearly as ominous as they sound. The IRS allows each taxpayer to give a certain amount every year without reporting the gift or paying tax.
For 2025, the annual exclusion amount is $19,000 per recipient. Married couples can effectively double that number by each making a gift, for a total of $38,000 per recipient.
If you give more than the exclusion amount, the excess simply reduces your lifetime estate and gift tax exemption, which is $13.99 million per person in 2025 (twice that for married couples). In 2026, the exemption increases to $15 million per person. You won’t actually pay gift tax unless your lifetime gifts exceed those very large thresholds.
With that in mind, here are five ways to make the most of your annual exclusion.
1. Give to multiple family members.
The annual exclusion applies per donor per recipient, with no limit on the number of people you can give to. If you have several children or grandchildren, this can be a simple way to move assets out of your estate while helping the next generation.
2. Double your impact as a couple.
Married couples can combine their exclusions. You and your spouse can each give $19,000 to the same person, for a total gift of $38,000, without filing any additional tax forms.
3. Pay education or medical expenses directly.
One of the most generous (and often overlooked) rules in the tax code is the ability to make unlimited payments for someone’s tuition or medical bills if — and only if — the payment is made directly to the school or provider.
These payments don’t count against your annual exclusion or lifetime exemption.
A caution: tuition paid directly by a parent may reduce a student’s eligibility for need-based aid. Payments made by grandparents or other relatives generally don’t.
4. Contribute to a 529 plan.
If education is a priority, a 529 plan is a powerful way to help. The IRS allows you to “front-load” five years’ worth of annual exclusion gifts into a single year — up to $95,000 per donor in 2025. This gives the account more time to grow tax-free, which can make a meaningful difference over 18 years.
5. Give appreciated assets.
When you give appreciated assets, you remove future capital gains from your own tax picture. Doing so can be remarkably tax-efficient if the recipient is in a lower tax bracket. They may be able to sell the asset with little or no capital gains tax. There are a couple of important caveats to keep in mind with this strategy, however.
First, if the recipient of the appreciated stock is younger than 18 years old, you may trip the “kiddie tax” rule, meaning the recipient’s unearned income above $2,700 per year, including capital gains income, will be taxed at the parent’s marginal tax rate.
Second, giving appreciated assets late in life is usually a mistake. Assets passed at death receive a step-up in basis, eliminating the capital gain entirely, while assets given during your lifetime don’t.
Thoughtful gifting can be one of the most rewarding parts of a financial plan — not only for tax reasons but for the impact it has on the people you care about. If you’re thinking about making gifts this season, I’m happy to help you think through the strategy that best fits your goals.
Steven C. Merrell is a managing director at Creative Planning (formerly known as Monterey Private Wealth). He welcomes questions you may have concerning investments, taxes, retirement or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road, Suite 202, Monterey, CA, 93940. Or you can email steve.merrell@creativeplanning.com. This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
