The History of the Lifetime Gift Tax Exemption

The lifetime gift tax exemption allows individuals to give a specific amount of assets over their lifetime without paying gift tax. This exemption is not a fixed figure, as its history has been shaped by decades of legislative adjustments. Its evolution reflects shifting economic priorities and philosophies on wealth, inheritance, and taxation.

Establishment of the Unified Gift and Estate Tax System

The federal gift tax was first established, briefly repealed, and then permanently reinstated by the Revenue Act of 1932. These early laws were designed to prevent individuals from circumventing the estate tax by gifting their assets before death. The initial lifetime exemption was $50,000 in 1932 but was reduced to $30,000 by 1942, where it remained for over three decades, creating separate systems for gift and estate taxes.

A major change occurred with the Tax Reform Act of 1976, which created an integrated system for both gift and estate taxes by introducing the unified credit. Instead of separate exemptions, taxpayers received one credit applicable against either lifetime taxable gifts or the estate tax. This meant that gifts made during one’s life would reduce the credit available to shelter assets in the estate.

The act replaced the previous $30,000 gift tax and $60,000 estate tax exemptions with a unified credit equivalent to an exemption of $120,667 in 1977. By 1981, the exemption equivalent had risen to $175,000. By 1987, the lifetime exemption reached $600,000, where it stayed until the end of the century.

Legislative Changes in the Early 21st Century

The 21st century began with frequent changes, starting with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This act scheduled increases in the estate tax exemption, rising from $675,000 in 2001 to $3.5 million by 2009. A notable feature of EGTRRA was its decision to decouple the lifetime gift tax exemption from the estate tax exemption. The lifetime gift tax exemption was fixed at $1 million for the years 2002 through 2010.

This separation created complexity in estate planning. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA 2010) temporarily reunified the gift and estate tax systems. It set the exemption amount at $5 million for 2010 and 2011, indexed for inflation thereafter.

The American Taxpayer Relief Act of 2012 (ATRA) made the provisions of TRA 2010 permanent, preventing a scheduled reversion to a $1 million exemption. ATRA solidified the $5 million exemption base, indexed for inflation, and the reunification of the gift and estate tax systems.

The Tax Cuts and Jobs Act and Exemption Portability

The Tax Cuts and Jobs Act of 2017 (TCJA) brought the next legislative overhaul, doubling the exemption base amount. For 2018, the exemption increased from a pre-TCJA level of $5.49 million to $11.18 million. This amount continues to be adjusted for inflation, reaching $13.61 million in 2024 and a projected $13.99 million in 2025.

The TCJA includes a sunset provision, as the increased exemption is scheduled to expire after December 31, 2025. Without congressional action, the exemption will revert to its pre-TCJA level of $5 million, adjusted for inflation, which is estimated to be around $7 million in 2026. IRS regulations confirm that gifts made using the higher exemption before the sunset will not be “clawed back” into a taxable estate if the donor dies after the amount decreases.

This period of high exemptions has also highlighted the importance of portability, a provision made permanent by ATRA in 2012. Portability allows a surviving spouse to use their deceased spouse’s unused exemption, known as the Deceased Spousal Unused Exclusion (DSUE). To use this provision, the executor of the first-to-die spouse’s estate must file a federal estate tax return (Form 706) to make the portability election, even if no tax is owed. This election can be made up to five years after the date of death for estates not otherwise required to file.

Table of Historical Lifetime Exemption Amounts

The following table provides a summary of the lifetime gift tax exemption amounts for selected years. These figures illustrate the exemption’s evolution, and the notes highlight the acts of Congress that drove these changes.

| Year | Lifetime Gift Tax Exemption Amount | Notes/Key Legislation |
| — | — | — |
| 1932 | $50,000 | Revenue Act of 1932 reinstates gift tax. |
| 1942 | $30,000 | Exemption amount reduced. |
| 1977 | $120,667 | Tax Reform Act of 1976 creates the unified credit. |
| 1987 | $600,000 | Exemption increased and stabilized for over a decade. |
| 2001 | $675,000 | Pre-EGTRRA amount. |
| 2002 | $1,000,000 | EGTRRA decouples gift and estate exemptions. |
| 2009 | $1,000,000 | Gift tax exemption remains at $1M while estate exemption rises. |
| 2011 | $5,000,000 | TRA 2010 reunifies and increases the exemption. |
| 2013 | $5,250,000 | ATRA makes the $5M base exemption “permanent” with inflation. |
| 2017 | $5,490,000 | Pre-TCJA inflation-adjusted amount. |
| 2018 | $11,180,000 | TCJA doubles the exemption base. |
| 2024 | $13,610,000 | Inflation-adjusted TCJA amount. |
| 2025 | $13,990,000 | Projected inflation-adjusted TCJA amount. |
| 2026 | ~$7,000,000 (Projected) | Scheduled sunset of TCJA increase. |