The gift tax is a federal tax on money or property you give to another person during your lifetime

The gift tax applies when you transfer something of value to someone else without receiving something of equal value in return. The person who gives the gift (the donor) pays the tax, not the person who receives it. However, most people never pay gift tax because the federal government allows you to give away a substantial amount before any tax is owed.

The tax rate itself is straightforward: it is the same as the estate tax rate, which is currently 40 percent on gifts above the threshold. But the threshold is so high that it shields nearly all givers from owing anything. Understanding when the tax applies requires knowing three separate limits: the annual exclusion, the lifetime exemption, and the tax rate that kicks in if you exceed both.

Key Takeaways

  • You can give up to $18,000 per person per year (as of 2024) without reporting the gift or owing tax, and this limit increases periodically with inflation.
  • Beyond the annual limit, you have a lifetime exemption of $13.61 million (as of 2024) before the 40 percent tax rate applies, and this amount changes yearly.
  • Gifts to spouses with U.S. citizenship and gifts to charities are not subject to gift tax at any amount.
  • You must file Form 709 with the IRS if you give more than the annual exclusion to one person in a single year, even if you owe no tax.
  • The annual exclusion and lifetime exemption are separate limits, so using part of your lifetime exemption does not reduce how much you can give tax-free each year.

The annual exclusion: how much you can give each year without reporting

The annual exclusion is the amount you can give to any one person in a calendar year without filing a gift tax return or using any of your lifetime exemption. For 2024, this amount is $18,000 per recipient. If you are married, your spouse can give the same amount to the same person, meaning a married couple can give $36,000 to one child in a single year without any tax consequence.

This limit applies per person, not per gift. You could give $18,000 in January and another $18,000 in December to the same person and stay within the annual exclusion. You could also give $18,000 to ten different people in the same year. The exclusion resets on January 1 each year.

The annual exclusion amount changes most years because it is tied to inflation and rounded to the nearest $1,000. It was $17,000 in 2023 and $16,000 in 2022. The IRS announces the new amount in October or November for the following year, so you can plan ahead if you are considering large gifts.

The lifetime exemption: your total giving threshold before tax applies

Once you give more than the annual exclusion to someone, you begin using your lifetime exemption. This is a separate pool of money you can give away over your entire life before the 40 percent tax rate applies. For 2024, the lifetime exemption is $13.61 million per person.

If you give $25,000 to your child in one year, you have exceeded the annual exclusion by $7,000. That $7,000 counts against your lifetime exemption, but you owe no tax because you have not exhausted the exemption. You could continue giving large amounts until your total lifetime gifts exceed $13.61 million. Only then would the 40 percent rate explore to gifts above that threshold.

The lifetime exemption is indexed to inflation and changes yearly, usually increasing. It was $12.92 million in 2023. This amount is set by federal law and can change if Congress passes new legislation. The exemption is also tied to the estate tax exemption, meaning the same $13.61 million limit applies to both gifts during your lifetime and your estate after death.

When the 40 percent tax rate applies

The 40 percent gift tax rate applies only to gifts that exceed both the annual exclusion and your remaining lifetime exemption. This is a high threshold that very few people reach. If you have given away $5 million during your lifetime and you give another $10 million in a single year, the first $8.61 million of that $10 million gift would be covered by your remaining lifetime exemption (since $13.61 million minus $5 million equals $8.61 million). The remaining $1.39 million would be subject to the 40 percent tax, meaning you would owe $556,000 in tax on that portion.

The tax is calculated on the amount of the gift itself, not on the income it generates. If you give someone $1 million in cash, the taxable amount is $1 million, not any interest or returns that money might earn later.

Gifts that are never taxed, no matter the amount

Certain gifts are completely exempt from gift tax regardless of size. Gifts to your spouse are never subject to gift tax if your spouse is a U.S. citizen. You can give your spouse any amount of money or property without filing a return or owing tax. If your spouse is not a U.S. citizen, there is an annual exclusion of $185,000 (as of 2024) instead of the standard $18,000.

Gifts to charities that hold a 501(c)(3) status or similar tax-exempt designation are also never subject to gift tax. You can donate any amount to a may have access to charity without owing tax or using your lifetime exemption. Payments made directly to a school or medical provider on behalf of someone else are also exempt, as long as you pay the institution directly rather than giving money to the person.

Gifts to political organizations and candidates are not subject to gift tax, though they may be subject to campaign finance limits under different rules.

How to report gifts that exceed the annual exclusion

If you give more than $18,000 to one person in a calendar year, you must file Form 709 (United States Gift Tax Return) with the IRS, even if you owe no tax because the gift is covered by your lifetime exemption. This form is filed with your federal income tax return or separately if you do not file an income tax return.

Form 709 requires you to list each gift over the annual exclusion, the date of the gift, the recipient's name and address, and the value of what was given. The form also calculates how much of your lifetime exemption you have used. You do not need to file Form 709 for gifts within the annual exclusion, gifts to your spouse, or gifts to charities.

Filing Form 709 does not mean you owe tax. It is a reporting requirement that documents your lifetime gifts so the IRS can track whether you have exceeded your exemption. If you do not file when required and you later exceed your lifetime exemption, the IRS may assess penalties in addition to the tax owed.

State gift taxes and other considerations

The gift tax discussed here is the federal gift tax. Some states also have their own gift tax, though only a few do. Connecticut, Delaware, Louisiana, North Carolina, and Tennessee have estate taxes that may affect large gifts, but most states have no separate gift tax. You should check your state's tax rules if you live in or are giving property located in one of these states.

Gifts of appreciated property (such as stock that has increased in value) have additional tax consequences beyond the gift tax itself. The person who receives the gift generally receives it at the current market value, which can affect their capital gains tax if they later sell it. This is a separate issue from the gift tax but is worth understanding if you are considering giving appreciated assets.

Frequently Asked Questions

Do I owe gift tax if I give my child money for college or a wedding?

Not if you pay the school or vendor directly. Payments made directly to an educational institution or medical provider are not subject to gift tax, regardless of amount. If you give your child cash to pay for college or a wedding, that counts as a gift and is subject to the annual exclusion and lifetime exemption rules.

What happens if I give someone more than $18,000 and do not file Form 709?

The IRS may assess penalties if you fail to file when required. However, if you have not exceeded your lifetime exemption, you still owe no gift tax itself — only the penalty for not reporting. Filing Form 709 is a reporting requirement separate from owing tax.

Can my spouse and I combine our annual exclusions to give one person $36,000?

Yes. Each spouse has their own $18,000 annual exclusion, so a married couple can give $36,000 to the same person in one year without either spouse filing a return or using their lifetime exemption. This is called "gift splitting" and requires both spouses to consent to the arrangement.

Does the gift tax explore to loans I make to family members?

A loan is not a gift if it is a genuine debt with a written agreement, a stated interest rate, and a repayment schedule. However, if you forgive the loan later, the forgiven amount may be treated as a gift subject to the annual exclusion and lifetime exemption rules.

What is the difference between the gift tax exemption and the standard deduction?

They are completely separate. The standard deduction reduces your taxable income on your income tax return. The gift tax exemption is a lifetime limit on how much you can give away before owing gift tax. They do not affect each other.