The federal gift tax rate is 40%, but most people never pay it

The federal gift tax applies only to gifts above a threshold amount, and that threshold is high enough that most people never reach it. For 2024, you can give away $18,000 per person per year without filing any paperwork or owing tax. If you give more than that in a single year to one person, you file Form 709 with the IRS — but you still do not owe tax unless your lifetime gifts exceed $13.61 million (this number changes yearly). When you do owe it, the rate is a flat 40%.

The confusion happens because the annual threshold and the lifetime threshold are separate rules. You can give $18,000 to your child, $18,000 to your spouse, $18,000 to a friend, and $18,000 to a grandchild in the same year without triggering any tax. You only file Form 709 if you give more than $18,000 to a single person in a single year. You only pay tax if your total lifetime gifts (above the annual thresholds) exceed the lifetime limit.

State gift taxes are separate and vary widely. Some states have no gift tax at all. Others tax gifts above much lower thresholds — Connecticut, for example, taxes gifts above $3,500 per person per year. Check your state's department of revenue website to learn whether your state has a gift tax and what its rules are.

Key Takeaways

  • You can give $18,000 per person per year (in 2024) without filing Form 709 or owing any federal tax.
  • Gifts above $18,000 to one person in one year require you to file Form 709, but you still owe no tax unless your lifetime gifts exceed $13.61 million.
  • The 40% tax rate applies only to gifts that exceed your lifetime threshold, which is indexed to inflation and changes yearly.
  • Your spouse, if a U.S. citizen, can receive unlimited gifts with no tax or filing requirement.
  • Some states impose their own gift taxes with lower thresholds, so check your state's rules separately.

The annual threshold: $18,000 per person per year

The annual exclusion is the amount you can give to any one person in a calendar year without filing Form 709. For 2024, that amount is $18,000. This resets on January 1 each year. If you give $18,000 to your daughter on December 31, 2024, you can give her another $18,000 on January 1, 2025, and neither gift requires a tax return.

The annual exclusion applies per recipient, not per giver. If you and your spouse both want to give money to your grandchild, you can each give $18,000 in the same year — that is $36,000 total — and neither of you files anything. The IRS calls this "gift splitting," and married couples use it routinely to move larger sums without paperwork.

The annual exclusion amount changes most years because it is tied to inflation and rounded to the nearest $1,000. In 2023 it was $17,000. In 2025 it will likely be $19,000, though the IRS announces the new amount in late October of the prior year. If you are planning a large gift, check the current year's exclusion on the IRS website before you transfer money.

The lifetime threshold: $13.61 million (and climbing)

Even if you give more than $18,000 to one person in one year, you do not owe tax unless your total lifetime gifts exceed the lifetime exemption. For 2024, that exemption is $13.61 million per person. This is a one-time pool: once you have given away $13.61 million above the annual thresholds, any additional gifts are taxed at 40%.

The lifetime exemption is indexed to inflation and increases most years. In 2023 it was $12.92 million. In 2025 it will be higher. The IRS publishes the new amount each October. You do not have to use your lifetime exemption all at once — you can give $1 million now and $2 million later, and both count toward your $13.61 million pool.

Your spouse has a separate lifetime exemption. If you are married, you each have $13.61 million to give away. If you give away $5 million and your spouse gives away $3 million, you have each used part of your own exemption, and you each still have room left.

When you file Form 709 and what it means

You file Form 709 (United States Gift and Generation-Skipping Transfer Tax Return) when you give more than $18,000 to a single person in a single calendar year. You do not file it because you owe tax — you file it to report the gift to the IRS and to use part of your lifetime exemption.

Form 709 is due by April 15 of the year after the gift. If you give $25,000 to your son in December 2024, you file Form 709 by April 15, 2025. The form lists the recipient's name, your relationship, the date of the gift, and the amount. You sign it and send it to the IRS with your tax return, or file it separately if you do not owe income tax that year.

Filing Form 709 does not mean you owe money. It means you are telling the IRS that you have used $7,000 of your $13.61 million lifetime exemption (the $25,000 gift minus the $18,000 annual exclusion). The IRS tracks this, and when you die, your estate uses the same lifetime exemption to determine whether estate tax is owed. If you have already used $13.61 million in lifetime gifts, your estate will owe 40% tax on anything above that threshold.

The 40% tax rate and who actually pays it

The federal gift tax rate is a flat 40% on gifts above your lifetime exemption. This is the same rate as the federal estate tax. In practice, very few people pay it because the lifetime exemption is so high. You would need to have given away more than $13.61 million above the annual thresholds during your lifetime to owe this tax.

The 40% is calculated on the value of the gift itself, not on income it generates. If you give $1 million in stock to your child, the tax (if owed) is 40% of $1 million, or $400,000. If that stock later grows to $2 million, the additional growth is not subject to gift tax — only the value at the time you gave it.

You, the giver, owe the tax, not the recipient. If you give away $20 million and owe gift tax, you pay it. The recipient does not. This is different from income tax: if you give someone money and they earn interest on it, they owe income tax on the interest, but you do not.

Gifts that are not taxed at all

Certain gifts are completely exempt from gift tax, meaning they do not count toward your annual exclusion or lifetime exemption. Gifts to your spouse (if a U.S. citizen) are unlimited and never taxed. You can give your spouse $1 million, $10 million, or $100 million, and none of it is a taxable gift.

Gifts to charities registered with the IRS as tax-exempt organizations are also not taxable gifts. If you donate $50,000 to a may have access to charity, it does not count against your annual exclusion or lifetime exemption. You may also be able to deduct the gift on your income tax return, though that is a separate calculation.

Payments made directly to a medical provider or school for someone else's care or tuition are not taxable gifts, even if they exceed $18,000. If you pay $30,000 directly to a hospital for your grandchild's surgery, or $60,000 directly to a university for your niece's tuition, neither counts as a gift. The payment must go directly to the provider — if you give the money to the person and they pay the provider, it is a taxable gift.

State gift taxes and how they differ

Nine states have their own gift tax: Connecticut, Delaware, Illinois, Louisiana, Mississippi, Nevada, North Carolina, South Dakota, and Tennessee. (This list changes as states add or remove the tax.) Each state sets its own annual threshold and tax rate, and they are usually more restrictive than the federal rules.

Connecticut, for example, taxes gifts above $3,500 per person per year at rates ranging from 3.6% to 16%, depending on the amount. Delaware taxes gifts above $12,000 per person per year. Illinois taxes gifts above $10,000 per person per year. If you live in one of these states or give money to someone who does, you may owe state gift tax even if you owe no federal tax.

To find your state's rules, search "[your state] gift tax" on your state's department of revenue website. Some states have no gift tax at all, which means you owe nothing to the state no matter how much you give. If you are unsure, contact your state's revenue office directly — they can tell you in one call whether a gift is taxable in your state.

Frequently Asked Questions

Do I have to report gifts to the IRS?

Only if you give more than $18,000 to one person in one calendar year. Then you file Form 709 by April 15 of the following year. Gifts of $18,000 or less per person per year require no reporting and no tax.

Can I give money to my child and avoid gift tax by saying it is a loan?

Only if the loan is real: you must charge interest at the IRS minimum rate (called the Applicable Federal Rate, or AFR), have a written promissory note, and actually collect payments. If you lend money with no interest and no repayment plan, the IRS may treat it as a gift. Consult a tax professional before structuring a large family loan.

What happens if I give away more than my lifetime exemption?

You owe 40% federal tax on the amount above $13.61 million. You pay this tax when you file Form 709 or when you file your estate tax return after death. The tax is due from your assets, not from the recipient.

Does my spouse's citizenship matter for gift tax?

Yes. Gifts to a spouse who is a U.S. citizen are unlimited and never taxed. Gifts to a spouse who is not a U.S. citizen are limited to $18,000 per year (in 2024) and count toward your lifetime exemption if you exceed that amount.

If I give someone money and they use it to pay taxes they owe, is that a taxable gift?

Yes. Paying someone else's tax bill is treated as a gift to that person. If you pay $10,000 in back taxes on behalf of your adult child, that $10,000 is a gift and counts toward the annual exclusion (or your lifetime exemption if it exceeds $18,000).