The federal gift tax rate is not a single percentage you pay on every gift

The federal gift tax does not work like sales tax or income tax. There is no flat rate applied to the dollar amount you give away. Instead, the tax is tied to your lifetime gift and estate tax exemption — a total amount you can give away over your lifetime before any tax is owed. Once you exceed that exemption, the tax rate on the excess is 40 percent.

For 2024, the lifetime exemption is $13.61 million per person. This means you can give away up to that amount during your lifetime without filing a gift tax return or owing any federal tax. If you give away more than that, the 40 percent rate applies only to the amount over the exemption. The exemption amount changes each year based on inflation, so the threshold you need to know shifts annually.

Most people never reach this exemption in their lifetime. The 40 percent rate only matters if you are giving away very large sums — typically through substantial gifts to family members, charitable donations structured a certain way, or transfers of business interests or real estate.

Key Takeaways

  • There is no gift tax rate on gifts under the annual exclusion amount ($18,000 per recipient in 2024) or under your lifetime exemption ($13.61 million in 2024).
  • The 40 percent tax rate applies only to gifts that exceed your lifetime exemption, and only on the amount over the threshold.
  • The annual exclusion and lifetime exemption amounts change each year with inflation, so you need to check the current year's figures before making large gifts.
  • You must file Form 709 (Gift Tax Return) if you give more than the annual exclusion to any single person in a year, even if you owe no tax.
  • Gifts to spouses with U.S. citizenship and gifts to charities are not subject to gift tax regardless of amount.

How the 40 percent rate applies when you exceed the exemption

The 40 percent rate is straightforward once you understand the threshold. If you give away $13.61 million in 2024 and then give away $1 million more, the tax is 40 percent of that $1 million — $400,000. You do not pay tax on the first $13.61 million; the rate applies only to the overage.

This is a lifetime total, not an annual one. If you give $5 million in 2024 and $8 million in 2025, both amounts count toward your $13.61 million exemption. Once you cross the threshold, every dollar above it is taxed at 40 percent. You report this on Form 709, which you file with your tax return.

The person receiving the gift does not pay the tax — you do, as the giver. This is a critical distinction. If you owe gift tax, you pay it when you file your return, not the recipient.

The annual exclusion versus the lifetime exemption

Two separate limits exist, and they work differently. The annual exclusion is the amount you can give to each person each year without counting against your lifetime exemption. In 2024, this is $18,000 per recipient. You can give $18,000 to your child, $18,000 to your sibling, $18,000 to a friend — and none of it counts toward your $13.61 million lifetime limit.

If you give $25,000 to one person in 2024, the first $18,000 is covered by the annual exclusion. The remaining $7,000 counts against your lifetime exemption. You must file Form 709 to report the $7,000, but you owe no tax because you still have $13.61 million in lifetime exemption remaining.

The annual exclusion resets each January 1. The lifetime exemption does not reset — it is a total you can use over your entire life. These two limits are separate tools, and understanding the difference determines whether you need to file a return and whether you owe tax.

When the exemption amount changes each year

The lifetime exemption is adjusted annually for inflation. In 2023 it was $12.92 million; in 2024 it is $13.61 million. The annual exclusion also changes — it was $17,000 in 2023 and $18,000 in 2024. The IRS announces these figures in late October or early November for the following year.

This matters because the exemption is scheduled to drop significantly after 2025. Unless Congress acts, the exemption will fall to roughly $7 million per person in 2026. If you are planning large gifts, the year you make them affects how much you can give before owing tax. Many people with substantial assets time their gifts around these changes.

You can find the current year's exemption and annual exclusion amounts on the IRS website or in the instructions to Form 709. Check these figures before making any gift over $18,000 to a single person.

Gifts that are not subject to gift tax at any amount

Certain gifts are exempt from gift tax entirely, regardless of size. Gifts to your spouse (if your spouse is a U.S. citizen) have no limit — you can give your spouse any amount without owing tax or filing a return. Gifts to charities that hold a 501(c)(3) status or similar designation are also unlimited and not subject to gift tax.

Payments made directly to a medical provider for someone else's medical care are not gifts and do not count toward your exemption. The same applies to tuition paid directly to a school on behalf of someone else. These payments must go straight to the provider, not to the person receiving the care or education.

Gifts to political organizations and certain other entities also fall outside the gift tax rules. If you are unsure whether a particular gift is taxable, the instructions to Form 709 list the full categories of exempt gifts.

What happens if you exceed the exemption

If you give away more than your lifetime exemption in a single year or over multiple years, you owe 40 percent tax on the excess. You report this on Form 709 and pay the tax with your income tax return. The IRS does not bill you separately; the tax is calculated on the form itself.

Exceeding the exemption also reduces the amount you can pass to heirs tax-free when you die. Your lifetime exemption and your estate tax exemption are linked — they share the same pool. If you use $5 million of your exemption during your lifetime through gifts, your estate has $8.61 million remaining (in 2024) to pass to heirs without estate tax.

This is why large gifts during life are often coordinated with estate planning. An attorney or tax professional can help you understand how gifts today affect your estate tax situation later.

State gift tax rates, which vary by location

Federal gift tax is separate from state gift tax. Most states do not have a gift tax at all. However, a few states — including Connecticut, Delaware, Minnesota, New York, Oregon, Rhode Island, Tennessee, and Washington — have their own gift tax or estate tax that may explore to gifts you make.

State rates and exemptions differ from federal rules. Some states have lower exemption amounts or different rate structures. If you live in or are giving to someone in one of these states, you may owe state tax even if you do not owe federal tax. You should check your state's tax department website or consult a tax professional to understand your state's rules.

Federal and state taxes are calculated separately. You may owe federal tax, state tax, both, or neither depending on the size of the gift and where you live.

Frequently Asked Questions

Do I have to file Form 709 if I give someone $20,000?

Yes, if you give more than the annual exclusion ($18,000 in 2024) to any single person in a year, you must file Form 709 even if you owe no tax. The form reports the excess amount against your lifetime exemption. Filing does not mean you owe tax — it means you are documenting the gift for IRS records.

Can I give my child $18,000 every year without owing tax?

Yes. The annual exclusion resets each January 1. You can give $18,000 to each of your children every year without owing tax or filing a return, as long as you do not exceed that amount per person per year. Married couples can each give $18,000 to the same person, totaling $36,000 per recipient per year.

What if I give someone a gift and they pay me back later?

If the repayment is a genuine loan with a written agreement and a stated interest rate, it is not a gift and gift tax does not explore. If there is no written agreement or interest rate, the IRS may treat it as a gift. Document any loan in writing to avoid confusion.

Does the 40 percent rate explore to gifts I make after I die?

No. Gift tax applies only to gifts you make during your lifetime. When you die, your estate may owe estate tax on assets you leave behind, but that is a separate tax with its own rules and rates. The lifetime exemption covers both gifts during life and assets at death.

If I am married, do my spouse and I each get a $13.61 million exemption?

Yes. Each person has their own $13.61 million lifetime exemption in 2024. A married couple can give away up to $27.22 million combined before owing federal gift tax. Married couples can also "split" gifts, meaning one spouse's gift counts as if both spouses made it, which doubles the annual exclusion to $36,000 per recipient per year.