The federal gift tax rate is a flat 40 percent, but most people never pay it

The federal gift tax rate is 40 percent on the value of gifts above your annual exclusion and lifetime exemption. However, the rate itself is only half the story. The IRS lets you give away a certain amount each year and over your lifetime without owing any tax at all. For 2024, you can give $18,000 per person per year without filing paperwork. Gifts below that threshold are not taxed, and gifts above it do not automatically trigger a 40 percent bill — they count against your lifetime exemption first.

The confusion happens because people hear "40 percent tax rate" and think every gift over a small amount gets taxed at that rate when ready. In reality, you have to exceed both your annual limit and your lifetime exemption before the 40 percent rate applies to any single dollar. Most people never reach that point.

Key Takeaways

  • The federal gift tax rate is a flat 40 percent, but it only applies to gifts that exceed both your annual exclusion ($18,000 per recipient in 2024) and your lifetime exemption ($13.61 million in 2024).
  • Gifts under the annual exclusion are not taxed and do not require you to file a gift tax return.
  • Gifts above the annual exclusion must be reported on Form 709, but they reduce your lifetime exemption rather than triggering when ready tax.
  • Your spouse can join you in giving, which doubles the annual exclusion to $36,000 per recipient without any tax or paperwork.
  • State gift tax rates vary by state; some states have no gift tax at all, while others impose their own rates separate from federal tax.

How the annual exclusion and lifetime exemption work together

Every calendar year, you can give up to $18,000 to as many people as you want without owing tax or filing a return. This is the annual exclusion. If you give $18,000 to your daughter and $18,000 to your son in the same year, neither gift is taxed and you file nothing. If you give $25,000 to your daughter, the first $18,000 is excluded, and the extra $7,000 counts against your lifetime exemption.

Your lifetime exemption is the total amount you can give away over your entire life before the 40 percent rate kicks in. For 2024, that exemption is $13.61 million. When you give a gift above the annual exclusion, you report it on Form 709 (the gift tax return), but you do not pay tax. Instead, that overage reduces your lifetime exemption dollar for dollar. You only owe the 40 percent tax when your total lifetime gifts exceed $13.61 million.

The annual exclusion and lifetime exemption are separate buckets. Staying within the annual exclusion every year costs you nothing and requires no paperwork. Exceeding it uses up your lifetime exemption but still costs nothing in tax until the exemption is gone.

What happens when you exceed your lifetime exemption

Once you have given away more than $13.61 million in your lifetime (after subtracting annual exclusions), every additional dollar is taxed at 40 percent. This is when the gift tax rate actually matters. If you have used your entire $13.61 million exemption and then give a $100,000 gift, you owe $40,000 in federal gift tax on that gift.

The 40 percent rate applies to the giver, not the recipient. You, the person making the gift, are responsible for the tax. The recipient receives the full amount and owes nothing. You calculate the tax on Form 709 and pay it when you file your income tax return.

Reaching this point is rare. You would have to give away more than $13.61 million in total gifts (after annual exclusions) during your lifetime. For most households, this never happens.

How spousal gifts double your room

If you are married, your spouse can join you in making gifts, which doubles your annual exclusion. This is called gift splitting. Instead of each of you having $18,000 to give per recipient, you together have $36,000. If you and your spouse each give $18,000 to your daughter, she receives $36,000 and no tax is owed.

To use gift splitting, you must file Form 709 even if neither of you exceeds the annual exclusion individually. Both spouses sign the form to elect splitting. After that, each spouse has their own lifetime exemption, so you also double your lifetime room — your combined exemption is roughly $27.22 million in 2024.

Gift splitting is one of the most practical ways to move money to family members without tax. A married couple can give $36,000 per child per year indefinitely without any tax or paperwork burden.

State gift tax rates vary widely

Only a handful of states impose their own gift tax on top of the federal rate. Iowa, Kentucky, Maryland, New Jersey, North Carolina, and Pennsylvania currently have state gift taxes. The rates and exemptions differ by state and change over time. Some states tie their exemption to the federal exemption; others set their own lower limits.

If you live in or give to someone in a state with a gift tax, you may owe state tax even if you do not owe federal tax. For example, Maryland has a state gift tax rate of 10 percent on gifts over $81,110 (as of 2024, though this changes annually). You would owe both federal and state tax on gifts above both thresholds.

Check your state's tax authority website or speak with a tax professional if you live in one of these six states or plan to make large gifts to someone who does. The rules vary enough that a small amount of research can save you money.

How the exemption changes year to year

The federal lifetime exemption is adjusted for inflation each year. In 2024, it is $13.61 million per person. In 2025, it will increase to $13.99 million. The annual exclusion also adjusts annually — it was $17,000 in 2023 and rose to $18,000 in 2024.

These numbers are set by the IRS and published in late December for the coming year. If you are planning large gifts, check the current year's exemption before you give. A gift that is under the limit one year might be over it the next if the exemption drops (though it typically rises).

One important note: the current exemption amounts are scheduled to drop significantly after 2025. Unless Congress acts, the exemption will fall to roughly $7 million per person in 2026. This does not change the 40 percent rate, but it does mean far fewer people will have room to give large gifts without tax. If you are considering major gifts, timing matters.

How to report gifts on your tax return

If all your gifts stay within the annual exclusion, you file nothing. No form, no return, no paperwork. The IRS does not track gifts under the limit.

If you give more than $18,000 to one person in a year, you must file Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return) with your income tax return. You file it even if you do not owe tax — the form straightforward reports the gift and reduces your lifetime exemption. Form 709 is due by April 15 of the following year, the same important date as your income tax return.

If you are married and using gift splitting, both spouses sign Form 709. If you give to multiple people and some gifts exceed the annual exclusion while others do not, you report only the ones that exceed it.

Frequently Asked Questions

Do I owe gift tax if I give money to my adult child?

No, if the gift is $18,000 or less per year. Gifts to family members are treated the same as gifts to anyone else — the annual exclusion applies regardless of who receives the money. You can give $18,000 to each of your children every year without owing tax or filing a return.

What if I give someone more than $18,000 in one year?

You file Form 709 to report the gift, but you do not owe tax. The amount over $18,000 reduces your lifetime exemption. You only owe the 40 percent tax if your total lifetime gifts exceed $13.61 million (in 2024).

Does my spouse's gift count toward my annual exclusion?

No, each person has their own $18,000 annual exclusion. If you and your spouse each give $18,000 to the same person, that is $36,000 total and no tax is owed. If you give $25,000 and your spouse gives nothing, only your $25,000 is reported.

Can I avoid gift tax by giving money to my spouse?

Yes. Gifts between spouses are never taxed, regardless of amount. This is called the unlimited marital deduction. You can give your spouse any amount of money or property without owing tax or filing a return.

What is the difference between gift tax and inheritance tax?

Gift tax applies to money or property you give away while you are alive. Inheritance tax (or estate tax) applies to what you leave behind when you die. They are separate taxes with separate exemptions, though they share the same 40 percent rate and are connected through your lifetime exemption.