Gift Tax Strategy California

Federal Gift Tax Overview

The federal gift tax applies to transfers of property during your lifetime without receiving full consideration in return. The gift tax is paid by the donor (the person making the gift), not the recipient. The gift tax and estate tax share the same $13.99 million lifetime exemption — taxable gifts made during your lifetime reduce the exemption available at death. The top gift tax rate is 40%, the same as the estate tax rate.

Annual Gift Tax Exclusion

The annual gift tax exclusion allows you to give up to $18,000 per recipient per year (2024 amount, adjusted for inflation) without using any of your lifetime exemption. Married couples can give $36,000 per recipient per year by "gift splitting" — each spouse is treated as making half the gift. The annual exclusion is per recipient, not per donor — you can give $18,000 to each of your children, grandchildren, and any other individuals without any gift tax consequences.

Lifetime Exemption

The lifetime gift and estate tax exemption is $13.99 million per person (2025). Taxable gifts — gifts above the annual exclusion — are reported on Form 709 and reduce your remaining lifetime exemption. You do not pay gift tax until you have used your entire lifetime exemption. After that, gifts are taxed at 40%. The OBBBA permanently extended the higher exemption, preventing the scheduled reversion to approximately $7 million per person.

Gifts That Are Not Taxable

In addition to the annual exclusion, the following gifts are completely exempt from gift tax: (1) Gifts to your spouse (unlimited marital deduction, for U.S. citizen spouses). (2) Gifts to qualifying charities. (3) Direct payments of tuition to an educational institution (not to the student). (4) Direct payments of medical expenses to a medical provider (not to the patient). These exclusions are unlimited — you can pay any amount of tuition or medical expenses directly without gift tax consequences.

California Gift Tax

California does not have a state gift tax. California residents only owe federal gift tax. This is consistent with California's lack of a state estate tax — California has chosen not to impose state-level transfer taxes.

Gift Tax Planning Strategies

KDA's gift tax planning strategies: (1) Annual exclusion gifting — give $18,000 per recipient per year to reduce your estate over time. For a couple with 3 children and 6 grandchildren, annual exclusion gifting can transfer $324,000 per year out of the estate. (2) 529 plan superfunding — contribute up to 5 years of annual exclusions ($90,000 per beneficiary) to a 529 plan in a single year. (3) Direct tuition and medical payments — pay tuition and medical expenses directly to the institution or provider. (4) Charitable giving — gifts to charity reduce the taxable estate and generate an income tax deduction.