The federal gift tax rate and when it applies

The federal gift tax rate is 40 percent, but you almost certainly will not pay it. The tax only applies to gifts above an annual threshold, and most people stay under that threshold their whole lives. For 2024, you can give up to $18,000 per person per year without triggering any tax or paperwork. If you are married and your spouse agrees, you can give $36,000 per couple per year to the same person.

Gifts above the annual limit do not when ready create a tax bill. Instead, they reduce your lifetime exemption — a separate pool of money you can give away tax-free over your entire life. For 2024, that lifetime exemption is $13.61 million per person. Once you exceed both your annual limit and your lifetime exemption, the 40 percent tax applies to the overage.

The annual limit and lifetime exemption change each year based on inflation. The IRS publishes the new numbers in October for the following year, so check the current year's figure before making large gifts.

Key Takeaways

  • You can give $18,000 per person per year (2024) without any tax or filing requirement, or $36,000 if you are married and your spouse consents.
  • Gifts above the annual limit reduce your lifetime exemption of $13.61 million (2024), but do not create an when ready tax bill unless you exceed both limits.
  • The 40 percent tax only applies to the portion of gifts that exceeds both your annual limit and your lifetime exemption combined.
  • Certain gifts — to spouses, to charities, and for medical or education expenses paid directly to providers — are never taxed regardless of amount.
  • You must file Form 709 if you give more than the annual limit to one person in a year, even if you owe no tax.

Gifts that do not count toward any limit

Some gifts are completely exempt from gift tax and do not reduce your lifetime exemption. Gifts to your spouse (if your spouse is a U.S. citizen) have no limit — you can give your spouse any amount tax-free. Gifts to registered charities also have no limit and are never taxed.

Payments made directly to a medical provider for someone else's care are not taxed, even if they exceed the annual limit. The same rule applies to tuition paid directly to a school or university. These payments must go straight to the provider; reimbursing someone for medical or education costs they already paid does count as a gift.

Gifts to political organizations and certain transfers between spouses during divorce also fall outside the gift tax system. If you are considering a large gift, check whether it falls into one of these categories before assuming you need to file.

When you have to file Form 709

You must file Form 709 (United States Gift Tax Return) if you give more than $18,000 to any one person in a calendar year, even if you owe no tax. Filing is how you report the gift and begin using your lifetime exemption. The important date is April 15 of the following year, the same as your income tax return.

If you are married and your spouse agrees to split the gift (treating it as if you each gave half), you both must file Form 709 to make that election official. Without both signatures on the form, the IRS will treat the entire gift as coming from you alone.

Failing to file Form 709 when required can cause problems later. The IRS may not know about the gift, and if you die before filing, your executor will have to sort out whether the gift reduced your lifetime exemption. Filing on time protects you and makes your estate's job easier.

How state gift taxes work differently

Only a handful of states have their own gift tax. Connecticut, Delaware, Illinois, Louisiana, Mississippi, North Carolina, and Tennessee impose a state-level gift tax separate from the federal tax. If you live in one of these states, you may owe state tax on gifts even if you owe no federal tax.

State gift tax rates and exemptions vary. Some states use the same $18,000 annual threshold as the federal system; others set their own limits. A few states tax gifts at rates between 5 and 16 percent. If you live in a state with a gift tax and plan to make large gifts, research your state's specific rules or consult a tax professional in your state.

Most states have no gift tax at all. If you live in one of those states, you only need to worry about the federal rules.

The lifetime exemption and what happens at death

Your lifetime exemption is the total amount you can give away tax-free over your entire life, including gifts during life and bequests in your will. Every gift above the annual limit uses up part of this exemption. When you die, any remaining exemption becomes part of your estate tax exemption.

The lifetime exemption is scheduled to drop significantly after 2025. For 2024 and 2025, it is $13.61 million and $13.99 million respectively. Starting in 2026, it is set to fall to roughly $7 million per person (adjusted for inflation), unless Congress changes the law. This means large gifts made now use the higher exemption, while gifts after 2025 will have a much smaller pool to draw from.

If you are considering a major gift and have a large estate, the timing matters. A tax professional can help you decide whether to give now and use the higher exemption, or wait and see whether Congress extends the current rules.

Gifts that trigger tax but are often overlooked

Forgiving a loan is treated as a gift. If you lend money to a family member and later forgive the debt, the forgiven amount counts as a gift and may trigger Form 709 filing. To avoid this, document the loan in writing and charge interest at the IRS minimum rate (which changes quarterly).

Selling property to someone below fair market value is also a gift. The difference between what you charged and what the property is worth counts as a taxable gift. If you sell your child a house worth $300,000 for $200,000, the $100,000 difference is a gift.

Allowing someone to live in your home rent-free for an extended period does not trigger gift tax, but providing housing in exchange for below-market rent may. The line is blurry, and the IRS looks at the facts of each situation. If you are providing housing as part of a family arrangement, document your intent and the terms clearly.

When to talk to a tax professional

You can handle small, straightforward gifts on your own. If you give $18,000 or less per person per year, you need do nothing. If you give more and file Form 709, the form itself is not complex — you list the gifts, their values, and the recipient, then calculate how much of your lifetime exemption you used.

Talk to a tax professional if you are making gifts over $100,000 in a year, if you have a large estate and are concerned about the 2026 exemption drop, if you live in a state with a gift tax, or if your gift involves property, forgiven loans, or below-market sales. A professional can also help you structure gifts to minimize tax and coordinate with your overall estate plan.

If you are unsure whether a particular transaction counts as a gift, ask before you complete it. Correcting a mistake after the fact is harder than getting it right the first time.

Frequently Asked Questions

Do I owe tax if I give my child $25,000 in one year?

No tax is due, but you must file Form 709. The first $18,000 is tax-free under the annual limit. The remaining $7,000 reduces your lifetime exemption but creates no tax bill unless you have already used up your entire $13.61 million exemption (which almost no one does).

What if I give the same person $10,000 twice in one year?

The gifts combine. Two $10,000 gifts to the same person in one calendar year total $20,000, which exceeds the $18,000 annual limit by $2,000. You must file Form 709 and report the $2,000 overage against your lifetime exemption.

Can I avoid gift tax by giving money to my child's spouse instead?

No. The annual limit applies per recipient, not per family. Giving $18,000 to your child and $18,000 to your child's spouse uses $36,000 of your exemption, but each gift is separate and each stays within the annual limit. You would not owe tax, but you would need to file Form 709 if you gave more than $18,000 to either one person.

Does paying my grandchild's college tuition count as a gift?

Only if you pay the grandchild directly. If you pay the university or college directly for tuition, it is not a gift and does not count toward any limit. If you give your grandchild money and they use it for tuition, that is a gift and may trigger Form 709 filing.

What happens if I die before I file Form 709 for a large gift?

Your executor will have to file it as part of settling your estate. The gift will still reduce your lifetime exemption and may affect your estate tax bill. Filing on time avoids confusion and makes your executor's job easier.