What the lifetime gift tax exemption is

The lifetime gift tax exemption is the total amount of money or property you can give away during your lifetime without owing federal gift tax. The IRS sets this amount, and it changes every year based on inflation. For 2024, you can give away $13.61 million total across your lifetime before gift tax applies. This is separate from what you can give each year without reporting it—that annual limit is $18,000 per person in 2024.

The exemption works like a bucket. Every time you give a gift larger than the annual limit, you draw from your lifetime bucket. Once you empty the bucket, gifts above the annual limit trigger a 40 percent federal tax on the amount over the limit. The person receiving the gift does not pay this tax—you do, as the giver.

This exemption also connects to your estate tax exemption. When you die, the IRS uses the same bucket to measure both lifetime gifts and everything you leave behind. If you have used part of your exemption on gifts, less remains available to shelter your estate from tax.

Key Takeaways

  • The lifetime exemption lets you give away $13.61 million (in 2024) without owing federal gift tax, but this amount resets and changes yearly.
  • Gifts under the annual limit ($18,000 per person in 2024) do not count against your lifetime exemption and do not require a tax form.
  • Using part of your lifetime exemption on gifts reduces the amount available to shelter your estate from tax when you die.
  • The exemption is federal only; some states have their own gift and estate taxes that explore regardless of the federal exemption.
  • You must file IRS Form 709 to report gifts over the annual limit, even if you do not owe tax because you have exemption remaining.

Annual gifts that do not count against the exemption

You can give up to $18,000 per person per year (in 2024) without using any of your lifetime exemption and without filing a tax form. This is called the annual exclusion. If you are married, your spouse can also give $18,000 to the same person, for a combined $36,000 per year per recipient.

The annual exclusion applies to gifts of present value—money or property the recipient can use or enjoy right now. It does not explore to gifts of future value, such as a promise to pay tuition next year or a loan at below-market interest rates. Gifts to a spouse who is a U.S. citizen have no limit at all, and gifts to charity are not limited either.

If you give more than $18,000 to one person in a year, you must file Form 709 with the IRS, even if you have plenty of lifetime exemption left. Filing the form does not mean you owe tax—it straightforward reports the overage to the IRS so they can track your lifetime total.

How the exemption shrinks your estate tax shelter

Your lifetime gift exemption and your estate tax exemption are linked. The IRS treats them as one combined pool. If you give away $5 million during your lifetime using your exemption, only $8.61 million of exemption remains to shelter your estate when you die (using 2024 numbers).

This matters most for people with substantial wealth. If your estate is worth less than the exemption amount, you will owe no estate tax regardless of how much you gifted during life. But if your total lifetime gifts plus your estate exceed the exemption, the excess is taxed at 40 percent.

The exemption amount is scheduled to drop on January 1, 2026, to roughly $7 million per person (adjusted for inflation), unless Congress changes the law. This means the pool shrinks significantly in a few years, which is why some wealthy people accelerate gifts now to use the current higher exemption.

State gift and estate taxes

The federal lifetime exemption does not protect you from state taxes. Several states have their own gift taxes or estate taxes with much lower exemption thresholds. New York, for example, has an estate tax exemption of $6.94 million (in 2024), and Illinois taxes estates over $4 million. A few states, including Iowa and Kentucky, tax gifts directly.

If you live in or own property in a state with a gift or estate tax, you may owe state tax on gifts or your estate even if you do not owe federal tax. You should check your state's rules before making large gifts, especially if you plan to move or own real estate in multiple states.

Reporting gifts over the annual limit

When you give more than $18,000 to one person in a calendar year, you must file IRS Form 709 (United States Gift and Generation-Skipping Transfer Tax Return) with your tax return for that year. You file it even if you do not owe any tax because you have exemption remaining.

Form 709 asks for the date of the gift, the recipient's name and address, the value of what was given, and your relationship to the recipient. The IRS uses this form to track your lifetime total and may support you do not exceed your exemption. If you do not file when required, the IRS may assess penalties, though they often waive them if you file late but before an audit.

You do not need to file Form 709 for gifts under the annual limit, gifts to your spouse, gifts to charity, or payments made directly to a school or medical provider on someone else's behalf. These are called may have access to transfers and are always exempt from gift tax.

Gifts that trigger gift tax reporting

Not all gifts require reporting. Gifts under $18,000 per person per year are invisible to the IRS—you give them and move on. But certain gifts always require Form 709 even if they are small: gifts of future interest (such as a remainder interest in property), gifts to a trust, and gifts of non-U.S. property to a non-citizen spouse.

Loans also have special rules. If you lend money to a family member at no interest or below-market interest, the IRS may treat the difference as a gift. To avoid this, you can use the IRS's applicable federal rate (AFR), which changes monthly. If you charge at least the AFR, no gift is deemed to occur, and you do not file Form 709.

Forgiving a loan is treated as a gift of the amount forgiven. If you lend $50,000 to your child and later forgive the debt, that forgiveness is a $50,000 gift and must be reported if it exceeds the annual limit.

Planning around the exemption before 2026

Because the federal exemption is set to drop significantly on January 1, 2026, some people with substantial assets are making larger gifts now to use the current exemption while it is high. This is called exemption planning or portability planning.

A common strategy is to give appreciated assets—such as stock or real estate that has grown in value—rather than cash. When you give appreciated property, the recipient receives it at your cost basis, meaning they inherit your original purchase price for tax purposes. If they sell it later, they owe capital gains tax only on the increase in value since they received it, not on the entire gain since you bought it.

Another approach is to use a grantor retained annuity trust (GRAT) or intentionally defective grantor trust (IDGT), which are legal structures that let you transfer appreciating assets while using less of your exemption. These strategies are complex and require a tax attorney or CPA to set up correctly.

Frequently Asked Questions

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

You do not owe tax, but you must file Form 709 to report the $7,000 overage ($25,000 minus the $18,000 annual limit). The overage uses $7,000 of your $13.61 million lifetime exemption. No tax is due unless and until your total lifetime gifts exceed your exemption.

What happens to my exemption if I do not use it?

Your unused exemption carries forward and combines with your estate tax exemption when you die. If you never gift anything, your full exemption shelters your estate. If you die before using it, your heirs do not inherit the unused exemption—it straightforward disappears.

Can my spouse and I combine our exemptions to give a larger gift?

You each have your own $13.61 million exemption. If you are married, you can each give $18,000 to the same person in one year ($36,000 combined) without either of you filing Form 709. For larger gifts, you each file separately and each use your own exemption.

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

No. If you pay a school or medical provider directly on someone's behalf, that payment is not a gift and does not count against your exemption or annual limit. You must pay the provider directly—if you give money to the person and they pay the bill, it is a gift.

What if I live in a state with its own gift tax?

You must follow both your state's rules and federal rules. Some states tax gifts during life; others tax only estates. Check your state's department of revenue website or speak with a tax professional in your state to understand what applies to you.