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

The federal gift tax itself is a flat 40% on the value of gifts above your lifetime exemption. However, this rate applies to very few people. You do not owe gift tax unless your total gifts across your entire life exceed $13.61 million (for 2024). That threshold is called your lifetime exemption, and it resets every January 1st based on inflation.

The practical answer for most households is zero percent. You can give away $18,000 per person per year (in 2024) without filing any paperwork or using any of your lifetime exemption. Married couples can give $36,000 per recipient annually. These annual exclusion amounts increase most years with inflation.

If you give more than the annual exclusion to one person in a single year, you file Form 709 (United States Gift Tax Return) to report it. Filing does not mean you owe tax — it means you are using part of your lifetime exemption instead. You only owe the 40% tax when you have exhausted your entire lifetime exemption and continue giving.

Key Takeaways

  • The gift tax rate is 40%, but it applies only to gifts above your $13.61 million lifetime exemption (2024).
  • You can give $18,000 per person per year without reporting anything or using your exemption.
  • Married couples can give $36,000 per recipient annually without filing.
  • Gifts above the annual exclusion require Form 709, but filing does not trigger tax unless you have already used your full lifetime exemption.
  • Your lifetime exemption may shrink after 2025 unless Congress extends current law.

When you actually file Form 709

You file Form 709 the year you give a gift larger than the annual exclusion to any single person. For example, if you give your daughter $25,000 in one calendar year, you file Form 709 that year to report the $7,000 overage ($25,000 minus the $18,000 annual exclusion).

Filing Form 709 does not cost you money — it uses $7,000 of your $13.61 million lifetime exemption. You still owe zero tax. The form straightforward documents that you are using part of your exemption now rather than saving it for later in life or for your estate after you die.

If you never exceed your lifetime exemption before death, your heirs pay no federal estate tax on what you leave them, up to that same $13.61 million threshold. The gift tax and estate tax share the same exemption pool.

Gifts that do not count toward the limit

Certain gifts are exempt from both the annual exclusion and the lifetime exemption. These do not require Form 709 and do not use any of your exemption:

  • Tuition or medical expenses you pay directly to the provider on someone else's behalf (not reimbursement to the person).
  • Gifts to your spouse (if your spouse is a U.S. citizen).
  • Gifts to charities that are registered with the IRS as tax-exempt organizations.
  • Gifts to political organizations and candidates.

The tuition and medical exception is often overlooked. If you pay your grandchild's college tuition directly to the university, that payment does not count as a gift at all. The same applies if you pay a hospital bill directly. But if you give your grandchild $50,000 and they pay the tuition themselves, that $50,000 counts as a gift and requires Form 709.

The 2026 exemption cliff

The current $13.61 million lifetime exemption is set to expire on December 31, 2025. Unless Congress extends it, the exemption will drop to approximately $7 million per person (adjusted for inflation) starting January 1, 2026.

This matters if you are planning large gifts or transfers. Some people with substantial assets have accelerated gifts into 2024 and 2025 to use the higher exemption before it shrinks. Others have used strategies like grantor retained annuity trusts (GRATs) or intentionally defective grantor trusts (IDGTs) to lock in current valuations before a potential exemption drop.

If you have a net worth above $7 million, or expect to, it is worth discussing the 2026 important date with a tax professional or estate attorney. The decision to accelerate gifts or restructure assets depends on your specific situation and family goals.

State gift taxes

Only a handful of states impose their own gift tax. Connecticut, Delaware, Louisiana, Mississippi, North Carolina, and Tennessee have gift taxes, though the rules and rates vary significantly by state.

Most states have no gift tax at all. If you live in a state without a gift tax, you only worry about the federal 40% rate and the federal exemption. If you live in one of the six states that do tax gifts, you may owe state tax in addition to federal tax, or you may face state-specific exemptions and rates.

State gift taxes are less common than state estate taxes. Some states tax what you leave behind at death but not gifts you make while alive. Check your state's department of revenue website or consult a local tax professional to understand your state's rules.

How the 40% rate is calculated

The 40% tax applies only to the portion of your gifts that exceeds your lifetime exemption. The IRS does not tax the exempted amount.

Here is a simplified example: suppose you have given away $13.61 million over your lifetime and used your entire exemption. You then give a $100,000 gift to your child. That $100,000 is above your exemption, so you owe 40% of $100,000, which is $40,000. You (the giver) pay this tax, not the recipient.

In practice, very few people reach this point. The exemption is so large that it covers most family wealth transfers. The 40% rate is a ceiling, not a typical cost.

Reporting gifts on your tax return

Gifts are not deductible on your federal income tax return. You cannot reduce your taxable income by giving money away. Form 709 is a separate filing — it does not go on your Form 1040.

If someone gives you a gift, you do not report it as income on your tax return either. Gifts are not taxable income to the recipient. The only person who files anything is the giver, and only if the gift exceeds the annual exclusion.

This is different from income. If your employer gives you a $10,000 bonus, that is taxable income. If your parent gives you $10,000 as a gift, it is not. The distinction matters for income tax purposes.

Frequently Asked Questions

Do I owe gift tax if I give my child $20,000 in one year?

No tax is owed, but you must file Form 709. The $20,000 exceeds the $18,000 annual exclusion by $2,000, so you report the $2,000 overage and use $2,000 of your $13.61 million lifetime exemption. Filing does not trigger a tax bill unless you have already exhausted your entire exemption.

What if I give money to my spouse?

Gifts to a U.S. citizen spouse are unlimited and never count against your exemption. You can give your spouse any amount without filing Form 709 or owing tax. If your spouse is not a U.S. citizen, different rules explore and you should consult a tax professional.

Can I split a gift with my spouse to avoid the annual exclusion?

Yes. If you and your spouse agree, you can treat a gift as if you both gave it, even if only one of you provided the money. This is called gift splitting. It doubles the annual exclusion to $36,000 per recipient. You both must file Form 709 to elect gift splitting, but it does not trigger tax.

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

You owe 40% federal tax on the amount above your exemption. For example, if you have used your full $13.61 million exemption and give a $100,000 gift, you owe $40,000 in gift tax. You pay this from your own funds; the recipient does not pay it.

Does paying someone's medical or tuition bills count as a gift?

Only if you pay the person directly. If you pay the provider (the hospital or university) directly on their behalf, it does not count as a gift and does not use your exemption. If you give them money and they pay the bill, it counts as a gift and may require Form 709.