Using Annual Gift Tax Exclusions in California: A Brief Guide
Depending on how your estate is structured and how much it’s worth, some of your wealth may be diminished by state and federal estate taxes. You can reduce the impact of taxes on the legacy you leave with gifting strategies and other proactive estate planning.
What Is a Gift Tax Exclusion?
One thing to consider as you plan for the future is whether you can leverage exclusions that let you pass on assets as gifts to loved ones.
Federal Gift Tax Exclusion
The IRS imposes a gift tax when someone transfers assets to another person without receiving in-kind value in return. Here are some examples of times the IRS might consider something to be a gift:
- A parent gives their adult child $5,000 in cash
- Someone agrees to sell their friend a car with a fair market value of $10,000 for $500—this could be considered a $9,500 gift
- A grandparent wants to give their home to an adult grandchild
The tax is typically levied on the donor, who is the person giving the assets. However, a federal annual gift tax exclusion allows you to give up to a certain amount every year to each recipient without triggering this tax.
The federal annual gift tax exclusion threshold changes from year to year. In 2023, it was $17,000 per recipient. In 2024, it is $18,000 per recipient.
Does California Have a Gift Tax Exclusion?
California doesn’t levy a gift tax, so there is no need for an exclusion. However, if you gift an asset to someone and that asset creates income, the individual will need to pay taxes on the income.
Benefits of Using the Annual Gift Tax Exclusion
The immediate benefit of leveraging gift tax exclusions is tax savings. Federal gift taxes can be between 18 and 40%. If you don’t plan ahead, that could take a sizeable chunk out of the legacy you want to pass on to someone—or substantially increase your expense to do so.
Proactive management of your estate that includes use of the gift tax exclusion can also help you divest assets over time, reducing the value of your taxable estate. This can reduce the burden of estate taxes later.
Long-term financial planning strategies that include gifting can help you fund education and other big expenses for loved ones. It also gives you more control over how you pass on your legacy, as you can funnel assets and cash to loved ones throughout the years instead of passing on your entire estate at once.
How Estate Planning and Gifting Strategies Work Together
Gifting strategies tend to work best for Californians when they combine them with proactive estate planning.
For instance, California doesn’t levy a tax on gifts, but the recipient may have to pay taxes on income generated by the asset. So, if you gift someone real property and that property goes up in value over time or you want to give them stocks as an investment, they may have to contend with a variety of taxes if they sell those assets for more later. However, you might consider whether it makes more sense to put the property in a trust that benefits your loved one rather than gifting the property directly to them.
On the other hand, if you have assets you definitely want to gift directly to someone without the use of a trust, you might consider how gift tax exclusions allow you to do this now to avoid probate later.
Concerns About Federal Gift and Estate Tax Exclusions in 2026
As you work with an estate planning attorney to create a long-term strategy for protecting wealth and passing on a legacy, talk to your lawyer about potential changes in the future. One example of a long-term concern is the lifetime maximum federal gift and estate exemption. This is the total amount you can give via gifts or inheritances to others before you lose the tax exemption. As of 2024, this amount is $13,610,000.
However, that amount is due to the Tax Cuts and Jobs Acts of 2017. Without action by federal legislators before January 1, 2026, the amount will reset, though it will be adjusted for inflation. The estimate of the new amount in 2026 without any congressional action would be around $7,000,000—around 50% of what the exclusion will be in 2025.
While federal legislators may work to extend the benefits of the 2017 act, the future is uncertain in this regard. An estate planning attorney can help you understand whether there are gifting strategies you can employ in the next few years to help reduce the impact should the tax exemption sunset in the future.
How Working With Estate Planning Professionals Can Help
Gifting is only one potential strategy you might use to pass on wealth while reducing tax burdens for yourself and your heirs. Estate planning lawyers will work with you to understand your financial situation as well as your short-term and long-term goals. They then offer guidance about holistic approaches to estate management and financial planning you might take to meet your objectives.
If you want to find out more about gifting strategies or other estate planning options, contact the Singh Law Firm. You can reach our team in Silicon Valley at 510-901-5375 and in Los Angeles at 818-658-2174.
