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

The federal gift tax rate is a flat 40 percent on gifts that exceed your annual limit. However, the IRS lets you give away a large amount before you owe any tax at all. For 2024, you can give up to $18,000 per person per year without reporting it. If you give more than that in a single year, you file a form and the excess counts against your lifetime exemption of $13.61 million. You only pay the 40 percent tax if your total lifetime gifts exceed that exemption.

Most people never hit that threshold. A parent giving $25,000 to a child, a grandparent funding a grandchild's college account, or a friend helping with a down payment—none of these trigger a tax bill. The tax exists mainly to prevent the very wealthy from avoiding estate tax by giving away their entire fortune while alive.

Key Takeaways

  • You can give $18,000 per person per year in 2024 without filing a gift tax form or owing any tax.
  • Gifts above $18,000 per person per year must be reported on Form 709, but you still do not owe tax unless your lifetime gifts exceed $13.61 million.
  • Spouses can combine their annual limits, allowing married couples to give $36,000 per person per year tax-free.
  • Certain gifts never count toward the limit: tuition paid directly to a school, medical expenses paid directly to a provider, and gifts to a spouse or charity.

How the annual limit works

The $18,000 annual exclusion applies to each person you give to, not to your total giving. If you give $18,000 to your daughter and $18,000 to your son in the same year, neither gift is reported and neither counts against your lifetime exemption. If you give $25,000 to your daughter, you report the $7,000 overage on Form 709, but you still owe no tax—the $7,000 straightforward reduces your $13.61 million lifetime exemption.

The annual limit changes every few years based on inflation. In 2023 it was $17,000. In 2025 it will likely be $18,000 or $19,000 depending on the final inflation adjustment. The IRS announces the new amount in October of the prior year.

The limit resets on January 1 each year. A gift on December 31 and another gift on January 1 are in different tax years and each gets its own $18,000 allowance.

Gifts that do not count at all

Some gifts are completely exempt from gift tax rules and do not count toward your annual limit or lifetime exemption. The most common are tuition and medical expenses paid directly to the provider. If you pay your grandchild's college tuition directly to the university, that payment is not a taxable gift no matter how large. The same applies to medical bills you pay directly to a hospital or doctor.

Gifts to your spouse are also unlimited and never taxed, as long as your spouse is a U.S. citizen. Gifts to registered charities are unlimited and tax-deductible. Gifts to political organizations and candidates have their own rules but are generally not subject to gift tax.

These exemptions exist because the IRS does not want to tax payments for education and health care, or to discourage charitable giving and spousal support. If you are considering a large gift, check whether it falls into one of these categories first.

What happens if you give more than the annual limit

If you give more than $18,000 to one person in a calendar year, you must file Form 709 (Gift Tax Return) with your federal income tax return. You do not owe tax at that moment. Instead, the excess amount is subtracted from your lifetime exemption of $13.61 million. Once your total lifetime gifts exceed $13.61 million, any additional gifts are taxed at 40 percent.

For example, if you give $50,000 to your child in 2024, you file Form 709 reporting the $32,000 overage ($50,000 minus the $18,000 annual limit). That $32,000 reduces your lifetime exemption from $13.61 million to $13.578 million. You owe no tax. You would only owe tax if your total lifetime gifts eventually exceeded $13.61 million.

The lifetime exemption is high enough that most households never reach it. Even a very generous parent or grandparent giving tens of thousands of dollars per year for decades usually stays well below the threshold.

Married couples and the annual limit

If you are married, you and your spouse can combine your annual exclusions. This means you can give $36,000 per person per year ($18,000 each) without filing a form. A married couple can give $36,000 to their daughter and $36,000 to their son in the same year, for a total of $72,000, with no reporting required.

To use your spouse's exemption, you must file Form 709 even if you do not owe tax. The form tells the IRS that you are splitting the gift with your spouse. This is called "gift splitting" and it requires both spouses to consent. You cannot use your spouse's exemption without their knowledge or agreement.

State gift tax

Only a handful of states have their own gift tax. Connecticut, Delaware, Louisiana, Mississippi, North Carolina, and Tennessee have some form of gift or inheritance tax, but the rules and rates vary widely. Most states have no gift tax at all. If you live in a state with a gift tax, you may owe state tax on gifts even if you owe no federal tax.

Connecticut and Delaware, for example, tax gifts above certain thresholds at rates between 3.5 and 16 percent depending on who receives the gift. Louisiana taxes gifts at rates up to 60 percent in some cases. Check your state's tax agency website if you live in one of these states and are planning a large gift.

Frequently Asked Questions

Do I have to report gifts under $18,000?

No. Gifts of $18,000 or less per person per year do not require a Form 709 and are not reported to the IRS. You can give this amount to as many people as you want without any paperwork.

What if I give someone $20,000 in one year and $16,000 the next year?

Each year is separate. The $20,000 in year one requires you to file Form 709 reporting the $2,000 overage, but you owe no tax. The $16,000 in year two is under the limit and requires no form. The overage from year one does not carry over or combine with year two.

Does a gift of cash count the same as a gift of property?

Yes. The annual limit and tax rules explore to cash, stocks, real estate, vehicles, jewelry, and any other property. The value of the gift is what matters. If you give someone a car worth $25,000, that counts as a $25,000 gift and the $7,000 overage must be reported.

Can I give money to my adult child for a house down payment without paying gift tax?

You can give up to $18,000 per year with no reporting. If you give more, you file Form 709 but owe no tax unless your lifetime gifts exceed $13.61 million. Most people never reach that threshold, so a $50,000 or $100,000 gift to help with a down payment typically requires a form but no actual tax payment.

What if my spouse and I want to give our daughter $40,000 for her wedding?

You can each give $18,000 (totaling $36,000) with no reporting. The remaining $4,000 requires you to file Form 709 reporting the overage, but you owe no tax. File the form with your joint tax return and indicate that you are splitting the gift with your spouse.