The federal gift tax rate and when it applies

The federal gift tax is 40 percent, but you almost certainly will not pay it. The tax only kicks in after you have given away more than $18,000 per person per year (in 2024; this amount changes yearly). Even then, you do not owe tax on the amount over that limit — instead, it counts against your lifetime exemption of $13.61 million. You only pay the 40 percent tax after you have used up that entire lifetime exemption.

For most people, the yearly limit is the only number that matters. If you give your adult child $18,000 in 2024, you file nothing and owe nothing. If you give them $25,000, you file Form 709 (the gift tax return) but still owe no tax — the $7,000 overage just reduces your lifetime exemption from $13.61 million to $13.603 million.

The yearly limit applies per recipient, not per gift. You can give $18,000 to your daughter, $18,000 to your son, and $18,000 to your spouse in the same year without filing anything. Married couples can combine their limits, so a married couple can give $36,000 to one person per year without filing.

Key Takeaways

  • The federal gift tax rate is 40 percent, but it only applies after you have given away more than $13.61 million in your lifetime (as of 2024).
  • You can give up to $18,000 per person per year without filing a gift tax return or reducing your lifetime exemption.
  • Married couples can give up to $36,000 per person per year by combining their yearly limits.
  • Gifts to spouses who are U.S. citizens and gifts to pay someone's medical bills or tuition directly to the provider do not count toward your limit at all.
  • Some states have their own gift tax with lower limits, so check your state's rules even if you owe nothing federally.

What counts as a gift for tax purposes

A gift is any transfer of money or property where you receive nothing of value in return. If you give your adult child $5,000 with no expectation of repayment, that is a gift. If you forgive a loan — meaning you tell them they no longer have to repay it — that is also a gift, and the amount forgiven counts toward your yearly limit.

Gifts include cash, real estate, stocks, artwork, vehicles, and jewelry. They also include below-market loans: if you lend money to a family member at zero interest or at a rate lower than the IRS minimum (which changes monthly), the difference between what they pay and what the IRS says they should pay is treated as a gift.

Some transfers are not gifts. If you pay someone's medical bills or college tuition directly to the provider — the hospital or the university — those payments do not count as gifts at all, no matter how large. Gifts to your spouse (if they are a U.S. citizen) also do not count. Neither do gifts to charities.

State gift tax rules

Only three states have a gift tax: Connecticut, Delaware, and Minnesota. Connecticut taxes gifts over $12,000 per person per year. Delaware taxes gifts over $12,000 per person per year. Minnesota taxes gifts over $10,000 per person per year. The rates vary by state and by how closely related you are to the recipient.

If you live in one of these states and give away money or property, you may owe state gift tax even if you owe nothing to the federal government. If you live elsewhere, you have no state gift tax to worry about. The federal limit is separate from any state limit.

When you have to file Form 709

You file Form 709 (United States Gift and Generation-Skipping Transfer Tax Return) when you give away more than the yearly limit to any one person in a single year. You file it even if you owe no tax, because the IRS needs to record that you have used part of your lifetime exemption.

File Form 709 with your federal income tax return for the year in which you made the gift. If you do not file it when required, the IRS may disallow your lifetime exemption later, which could cost you thousands in taxes when you die or give away very large amounts.

You do not file Form 709 for gifts under the yearly limit, gifts to your spouse, gifts that pay medical or tuition bills directly to the provider, or gifts to charities. You also do not file if you are married and your spouse agrees to split the gift with you (meaning you each use half of your yearly limit), even if the gift is large — but you must file to make that election official.

How the lifetime exemption works

The lifetime exemption is a pool of money you can give away over your entire life without owing the 40 percent tax. As of 2024, that pool is $13.61 million. Every time you give away more than $18,000 to one person in a year, the overage comes out of that pool.

The lifetime exemption is also the same as your estate tax exemption. If you give away $1 million during your life, your estate can only pass $12.61 million to your heirs tax-free when you die. The two limits are linked.

The lifetime exemption amount changes yearly and is set to drop significantly after 2025. In 2026, it is scheduled to fall to roughly $7 million (adjusted for inflation). This is why some people with large estates make large gifts now — to use the higher exemption while it lasts.

Common mistakes to avoid

The biggest mistake is not filing Form 709 when you should. If you give away $25,000 to your child and do not file, the IRS may later say you never used your lifetime exemption for that $7,000, which could cost you in taxes later. Filing is free and takes an hour or two.

Another mistake is treating a loan as a gift without documenting it. If you lend money to a family member, put it in writing and charge at least the IRS minimum interest rate (which you can find on the IRS website each month). If you do not, the IRS can treat the whole loan as a gift, which counts against your limit.

A third mistake is giving away property without understanding the tax basis. If you give someone stock you bought for $1,000 that is now worth $20,000, they inherit your $1,000 basis. If they sell it when ready, they owe capital gains tax on the $19,000 gain. Waiting until you die to pass it on gives them a "stepped-up basis" — they inherit it at its value on the date of death, so they owe no capital gains tax if they sell right away.

Frequently Asked Questions

Do I owe gift tax on money my parents gave me?

No. Gift tax is paid by the person who gives the money, not the person who receives it. Your parents may have had to file Form 709 if the gift was large, but you owe nothing. The U.S. does not tax gifts received.

What if I give someone money and they give me something back — is that still a gift?

No, if the value is roughly equal. If you give your friend $500 and they give you a used guitar worth $500, that is a trade, not a gift. But if you give them $500 and they give you a guitar worth $100, the $400 difference is a gift and counts toward your limit.

Can I avoid gift tax by giving money in small amounts throughout the year?

No. The $18,000 yearly limit is per person per year, not per transaction. If you give someone $5,000 in January, $5,000 in June, and $8,000 in December, that is $18,000 total to that person in that year. You have hit the limit and must file Form 709, even though each individual gift was small.

Does my spouse's gift limit count separately from mine?

Yes, unless you are married and file a joint gift tax return. Each person has their own $18,000 yearly limit. If you are married, you can combine your limits on Form 709 to give $36,000 per person per year, but you must file to make that election.

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

You owe 40 percent federal tax on the amount over your lifetime exemption. If you have used up your entire $13.61 million exemption and give away another $100,000, you owe $40,000 in gift tax. This is rare and only happens to people with very large estates.