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

The federal gift tax is a tax on money or property you give to another person during your lifetime. The tax rate is a flat 40% on gifts that exceed your annual limit. However, the vast majority of people never owe gift tax because the IRS allows you to give away a large amount before the tax kicks in.

For 2024, you can give up to $18,000 per person per year without reporting it to the IRS or using any of your lifetime exemption. If you're married, you and your spouse can each give $18,000 to the same person, for a combined $36,000 per year. These amounts change yearly based on inflation, so the limit may be different in future years.

Beyond the annual limit, you have a lifetime exemption — a total amount you can give away over your entire life before owing any tax. For 2024, that lifetime exemption is $13.61 million per person. You don't owe tax on gifts within this exemption; you just have to file a form with the IRS to report that you've used part of it.

Key Takeaways

  • The federal gift tax rate is 40%, but it only applies to gifts above your annual limit ($18,000 per person in 2024) and lifetime exemption ($13.61 million in 2024).
  • Most gifts — to family, friends, or charity — fall within the annual limit and require no tax or reporting.
  • Gifts to a spouse who is a U.S. citizen have no limit and are never taxed.
  • If you give more than the annual limit to one person, you report it on Form 709 but typically owe no tax unless you've exhausted your lifetime exemption.
  • The lifetime exemption amount changes with inflation and may be lower in future years, so large gifts made now use up your current exemption.

What counts as a gift for tax purposes

A gift is any transfer of money or property where you receive nothing of equal value in return. This includes cash, real estate, vehicles, investments, artwork, and even forgiving a loan. If you pay someone's tuition or medical bills directly to the school or hospital, those payments are not considered gifts and don't count toward your limit.

Gifts to your spouse (if they are a U.S. citizen) are never taxed and have no limit. Gifts to charities registered with the IRS also have no limit and are not subject to gift tax. Gifts to political organizations may have different rules depending on the type of organization.

Gifts that happen after you die — transfers through your will or estate — are handled under estate tax, not gift tax. These are separate taxes with separate rules.

When you have to report a gift to the IRS

You must file Form 709 (United States Gift Tax Return) if you give more than $18,000 to any one person in a single year. You file this form even if you don't owe any tax, because the IRS needs to know you've used part of your lifetime exemption.

The form is due by April 15 of the year after you made the gift, the same important date as your income tax return. If you file your income tax return late, your gift tax return is also considered late.

If you give exactly $18,000 or less to each person in a year, you don't file Form 709 and you don't report anything to the IRS. Your annual limit resets on January 1 each year.

How the lifetime exemption works

Your lifetime exemption is a pool of money you can give away tax-free over your entire life. When you give a gift above the annual limit, you use up part of that pool. For example, if you give $50,000 to your child in 2024, you've used $32,000 of your lifetime exemption ($50,000 minus the $18,000 annual limit).

You don't owe tax on that $32,000 — it straightforward reduces the amount you can give away tax-free for the rest of your life. If your lifetime exemption is $13.61 million and you use $32,000 of it, you have $13.578 million left.

The lifetime exemption is set by federal law and changes periodically. The current amount ($13.61 million in 2024) is scheduled to drop to roughly $7 million per person on January 1, 2026, unless Congress changes the law. This means large gifts made before 2026 lock in the higher exemption amount, while gifts made after 2026 will use the lower exemption.

State gift tax and inheritance tax

The federal gift tax is separate from state taxes. Most states do not have a gift tax, but a few do: Connecticut, Delaware, Louisiana, Mississippi, North Carolina, and Tennessee have inheritance taxes (taxes on what someone receives), while Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania also have inheritance taxes. These state taxes are paid by the person who receives the gift or inheritance, not by the giver.

If you live in or give property to someone in a state with an inheritance tax, you may owe that state tax in addition to any federal tax. The rules and rates vary by state, so check your state's tax authority website if you're making a large gift.

Gifts that don't count toward your limit

Certain transfers are not considered gifts for tax purposes and don't use up your annual limit or lifetime exemption. Payments made directly to a school for tuition are excluded, as are payments made directly to a medical provider for someone's healthcare. These exclusions explore even if the amount is very large.

Gifts to your spouse (U.S. citizen) and gifts to registered charities are also unlimited and don't count. Normal gifts to political candidates and organizations may have different treatment depending on the organization type.

If you forgive a loan to someone, that forgiveness is treated as a gift. However, if you have a written loan agreement with a stated interest rate and the borrower is making payments, the IRS may not treat it as a gift even if you later forgive the balance.

What happens if you owe gift tax

If you've exhausted your lifetime exemption and give away more money, you owe gift tax at the 40% rate on the amount above your annual limit. You calculate the tax on Form 709 and pay it when you file the form by April 15.

Gift tax is rare because the lifetime exemption is very large. You would have to give away millions of dollars to your children, friends, or others (excluding your spouse and charities) before owing any tax. Most people use their lifetime exemption only through their estate when they die, not through gifts made during life.

If you think you might owe gift tax, consult a tax professional or CPA. They can review your specific situation and help you file Form 709 correctly.

Frequently Asked Questions

Do I have to pay gift tax on money my parents give me?

No. The person who gives the gift pays any gift tax, not the person who receives it. Your parents can give you up to $18,000 per year with no tax or reporting. If they give you more, they report it on Form 709, but they typically owe no tax unless they've already given away over $13.61 million in their lifetime.

What if I give $25,000 to my child in one year?

You file Form 709 to report the gift because it exceeds the $18,000 annual limit. The $7,000 over the limit uses up $7,000 of your $13.61 million lifetime exemption. You owe no tax unless you've already used up your entire lifetime exemption through previous large gifts.

Does paying someone's college tuition count as a gift?

If you pay the tuition directly to the school, it does not count as a gift and has no limit. If you give money to your child and they pay the tuition themselves, it counts as a gift and is subject to the annual limit. The key is whether the money goes directly to the educational institution.

Can my spouse and I each give $18,000 to the same person?

Yes. Each person has their own $18,000 annual limit. If you're married, you can each give $18,000 to your child, your grandchild, or anyone else, for a total of $36,000 per year per recipient. This is called "gift splitting" and requires both spouses to agree.

What is the difference between gift tax and estate tax?

Gift tax applies to money or property you give away during your lifetime. Estate tax applies to everything you own when you die. They share the same lifetime exemption ($13.61 million in 2024), so large gifts made during life reduce the amount you can pass tax-free through your estate.