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

The federal gift tax is a 40% tax on gifts above a certain amount. However, you only owe it if you give away more than your lifetime exemption allows. For 2024, that exemption is $13.61 million per person — meaning you can give that much away during your lifetime without owing any gift tax at all. Most people never reach that threshold.

The tax applies to gifts of money, property, investments, or anything else of value. It does not matter whether the recipient is a family member, a friend, or anyone else. What matters is the dollar amount of what you gave and whether you have already used up your exemption in previous years.

Some gifts are never taxed, no matter the amount. These include gifts to your spouse (if they are a U.S. citizen), gifts to charities, and gifts that pay someone's tuition or medical bills directly to the school or provider.

Key Takeaways

  • The gift tax rate is 40%, but it only applies to gifts above your lifetime exemption of $13.61 million (in 2024).
  • You can give up to $18,000 per person per year without counting against your exemption, and spouses can combine their limits.
  • Gifts to spouses, charities, and direct payments for tuition or medical care are never taxed, regardless of amount.
  • The exemption amount changes yearly and is scheduled to drop significantly after 2025 unless Congress acts.

Annual exclusion: the $18,000 rule

Even though your lifetime exemption is very high, there is a smaller yearly limit that works differently. You can give up to $18,000 per person per year (in 2024) without that gift counting toward your lifetime exemption at all. This is called the annual exclusion.

If you give your adult child $18,000 in January and another $18,000 in December of the same year, you have not used any of your lifetime exemption. You can do this every year for as many people as you want. If you are married, your spouse can give the same amount to the same person in the same year, so a married couple can give $36,000 per person per year without any tax consequences.

The annual exclusion amount changes each year based on inflation. It was $17,000 in 2023 and $18,000 in 2024. The IRS announces the new amount in October for the following year.

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. If you sell your car to your daughter for $5,000 but it is worth $15,000, the $10,000 difference is a gift. If you loan money to a family member with no written agreement and no interest, the IRS may treat it as a gift instead of a loan.

Gifts include cash, real estate, stocks, artwork, jewelry, vehicles, and life insurance policies. They also include forgiving a debt — if you tell someone they no longer owe you money, that forgiveness is treated as a gift equal to the amount owed.

Gifts do not include payments you make directly to a school for tuition or directly to a medical provider for someone's healthcare costs. You can pay unlimited amounts this way without any gift tax or exemption consequences, as long as you pay the provider directly and not the person receiving the care.

Lifetime exemption and how it works

Your lifetime exemption is the total amount you can give away over your entire life before owing gift tax. In 2024, this amount is $13.61 million per person. If you are married, each spouse has their own $13.61 million exemption.

Gifts that exceed the annual exclusion count against your lifetime exemption. If you give your child $50,000 in a single year, the first $18,000 is covered by the annual exclusion. The remaining $32,000 counts against your $13.61 million lifetime exemption. You still owe no tax — you are just using up part of your exemption.

Once you have used your entire lifetime exemption, any additional gifts above the annual exclusion trigger a 40% tax. You file Form 709 with the IRS to report gifts that exceed the annual exclusion, even if you owe no tax because you still have exemption remaining.

State gift taxes and variations

The federal government is not the only one that can tax gifts. Some states also have their own gift taxes, though most do not. Currently, only a handful of states impose a gift tax: Connecticut, Delaware, Louisiana, Minnesota, Mississippi, North Carolina, and Tennessee. The rules and rates vary by state.

If you live in a state with a gift tax, you may owe tax to that state even if you owe nothing to the federal government. The state exemption is usually lower than the federal exemption. For example, Connecticut's lifetime exemption is $3.5 million, much lower than the federal amount. You should check your state's tax rules if you live in one of these states and plan to make large gifts.

The exemption is scheduled to change after 2025

The current high exemption amount is temporary. Unless Congress changes the law, the lifetime exemption will drop to approximately $7 million per person (adjusted for inflation) on January 1, 2026. This is sometimes called the "sunset" of the Tax Cuts and Jobs Act of 2017.

If you are planning to make large gifts, the timing matters. Some people choose to give money or property before 2026 to take advantage of the higher exemption. Others wait to see whether Congress extends the higher amount. There is no single right answer — it depends on your personal situation and your plans.

The annual exclusion amount is not scheduled to change dramatically, though it does adjust yearly for inflation.

How to report gifts to the IRS

You report gifts using Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. You file this form if you gave gifts that exceeded the annual exclusion in a given year, even if you owe no tax because you still have lifetime exemption remaining.

You do not file Form 709 for gifts under the annual exclusion. If you gave $18,000 or less to each person in a year, you have nothing to report. You also do not file if you gave money directly to a school for tuition or to a medical provider for healthcare costs.

Form 709 is due on April 15 of the year following the year you made the gift, the same important date as your income tax return. If you file your income tax return late, your Form 709 is also due on that later date.

Frequently Asked Questions

Do I owe gift tax if I give money to my adult child?

Not unless you give more than $18,000 in a single year (in 2024). Gifts up to the annual exclusion are never taxed. If you give $50,000, the first $18,000 is tax-free, and the remaining $32,000 counts against your lifetime exemption but still owes no tax unless you have already used up your entire exemption.

What if I give money to multiple people in the same year?

The annual exclusion applies per person, not per year total. You can give $18,000 to your child, $18,000 to your grandchild, and $18,000 to a friend all in the same year, and none of it is taxed. If you are married, your spouse can give the same amount to each of those people as well.

Does paying someone's medical bill count as a gift?

Only if you give money to the person. If you pay the medical provider or hospital directly for their care, it is not a gift and is never taxed, no matter the amount. But if you give your child $10,000 and they use it to pay their medical bills, that $10,000 is a gift subject to the annual exclusion rules.

Can I give my spouse unlimited money without gift tax?

Yes, but only if your spouse is a U.S. citizen. Gifts between spouses who are both U.S. citizens are never taxed, regardless of amount. If your spouse is not a U.S. citizen, the annual exclusion is lower ($18,000 in 2024 becomes $185,000 in 2024 for non-citizen spouses), and larger gifts count against your lifetime exemption.

What happens if I do not report a gift on Form 709?

The IRS may not catch it, especially if the gift is small or goes to a family member. However, if you are audited or if the IRS notices large transfers into someone's account, they can assess penalties and interest on any unpaid tax. It is safer to file Form 709 when required, even if you owe no tax.