The History of the Gift Tax Exclusion

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Gifts may come with strings attached for the giver.
Gifts may come with strings attached for the giver. (Image: gawriloff/iStock/Getty Images)

When you make a gift of property or money, you must pay taxes on the transfer. But the tax law has some exclusions that allow you to make gifts without being taxed. One is an annual exclusion; the other is a lifetime exclusion. Over the past century the federal government has taken a variety of approaches to these exclusions, sometimes decreasing them but more often raising the ceiling.

Before the Exclusion

The first gift tax was introduced in 1924. It followed the same schedule as the estate tax and had no exclusions. This made it impossible to avoid taxes when transferring wealth, either in life or death. According to a 2007 publication by the Senate Committee on Finance, the gift tax was unpopular and was repealed in 1926. This allowed people to once again transfer gifts of any amount without being taxed.

The Early Days

The gift tax was reintroduced in 1932 -- but with exclusions. It had a lifetime exclusion of $50,000 that applied to both the gift tax and estate tax. The lifetime exclusion was reduced to $40,000 in 1935. It also included an annual exclusion that was relatively large for the period -- $5,000.The annual exclusion was intended to allow individuals to transfer money for weddings, Christmas giving and other gifts, but it also allowed them to transfer sizeable estates to their family members over the course of several years. To prevent this latter practice, the gift tax exclusion was reduced in 1939.

Midcentury Changes

From 1939 to 1942 the annual gift tax exemption was set at $4,000. Although this was a 20 percent reduction of the exclusion, it still allowed individuals to pass on large properties to family members over time. Congress was unable to abolish the exclusion for administrative reasons but sought to limit this loophole by further reducing the exclusion to just $3,000. The exclusion remained at this level for nearly 40 years. In 1942 the lifetime exclusions for estate taxes and gift taxes were separated. The lifetime gift tax exclusion was set at $30,000.

The 1970s and 1980s

In 1976 the lifetime exclusions for the estate tax and gift tax were combined into one lifetime exclusion of $175,625 as part of the Tax Reform Act. By 1987 this exclusion increased to $600,000. In 1981 the annual gift tax exclusion was increased from $3,000 to $10,000. For couples making a gift, the exclusion was double -- $20,000.

Recent History

The lifetime exclusion for the gift tax and estate tax did not increase again until 1998, when it was set at $625,000. It increased several times over the next decade and a half. As of the time of publication, the lifetime exclusion is $5,430,000. The annual exclusion remained the same until 2002, when it increased to $11,000 per person or $22,000 per couple. As of the publication date, the annual exclusion is $14,000 for a single gift giver or $28,000 for a couple.

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