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 above a certain threshold. However, the threshold is high enough that most Americans never owe gift tax at all. In 2024, you can give away $18,000 per person per year without triggering the tax. If you give more than that to one person in a single year, you file a form to report it — but you still may not owe tax, because you have a lifetime exemption of $13.61 million that shields most gifts from taxation.

The 40 percent rate applies only to the amount that exceeds both your annual limit and your lifetime exemption. Because of how high these thresholds are, the gift tax affects almost exclusively people transferring very large estates or making unusually large gifts during their lifetime.

Key Takeaways

  • The federal gift tax rate is 40 percent, but it applies only to gifts above $18,000 per person per year in 2024, and only after you exhaust your $13.61 million lifetime exemption.
  • You do not owe tax on gifts under $18,000 per recipient per year, and you do not file a form for those gifts.
  • If you give more than $18,000 to one person in a year, you file Form 709 with the IRS, even if you do not owe tax.
  • The annual limit and lifetime exemption change each year based on inflation; the amounts stated here are for 2024 tax returns filed in 2025.
  • Gifts to spouses with U.S. citizenship, to charities, and to pay someone's medical bills or tuition directly do not count against your limits.

How the 40 percent rate applies to your gifts

The 40 percent rate is straightforward in theory but rarely triggered in practice. Imagine you give $50,000 to your adult child in 2024. The first $18,000 is tax-free under your annual exclusion. The remaining $32,000 counts against your lifetime exemption of $13.61 million. You file Form 709 to report the gift, but you owe no tax because you have not used up your lifetime exemption.

Now imagine you have already given away $13.61 million over your lifetime and you give another $50,000 gift. The first $18,000 is still tax-free under the annual exclusion. The remaining $32,000 exceeds your lifetime exemption. On that $32,000, you owe 40 percent — which is $12,800. You file Form 709 and pay the tax to the IRS.

The rate does not change based on who receives the gift, how many gifts you make, or the type of property you give. It is always 40 percent on the taxable amount.

The annual exclusion and lifetime exemption explained

These two separate limits work together. The annual exclusion is the amount you can give to any one person in a calendar year without filing a form or using your lifetime exemption. In 2024, that amount is $18,000. You can give $18,000 to your child, $18,000 to your grandchild, $18,000 to your friend, and $18,000 to your sibling all in the same year, and none of it counts against your lifetime exemption.

The lifetime exemption is the total amount you can give away over your entire life before the 40 percent tax kicks in. In 2024, that amount is $13.61 million. Once you have given away $13.61 million (after subtracting all your annual exclusions), every additional dollar you give is subject to the 40 percent tax.

Both numbers change each year. The annual exclusion increases in $1,000 increments when inflation warrants it. The lifetime exemption is set by Congress and changes periodically; it was $12.92 million in 2023 and is scheduled to drop to roughly $7 million in 2026 unless Congress acts.

What gifts count and what do not

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, and artwork. It also includes forgiving a loan — if you lend your child $50,000 and then forgive the debt, that forgiveness is treated as a gift.

Some transfers do not count as gifts at all. Gifts to your spouse (if your spouse is a U.S. citizen) are unlimited and do not count against your annual exclusion or lifetime exemption. Gifts to registered charities are also unlimited and do not count. Payments made directly to a school for tuition or directly to a medical provider for medical bills do not count as gifts, even if you pay them on someone else's behalf — but the payment must go straight to the provider, not to the person receiving the service.

Gifts to non-citizen spouses are subject to a lower annual exclusion ($18,000 in 2024, same as other recipients, but with different rules for the lifetime exemption). Gifts to political organizations and certain other entities have their own rules.

When you file Form 709 and what it means

You file Form 709 (United States Gift and Generation-Skipping Transfer Tax Return) when you give more than $18,000 to a single person in a calendar year. You file it even if you do not owe tax, because the IRS uses it to track your lifetime exemption. The form is due April 15 of the year after the gift, the same important date as your income tax return.

Filing Form 709 does not mean you owe tax. It means you are reporting the gift and using part of your lifetime exemption. The form shows the IRS how much of your $13.61 million exemption you have used, so they know how much remains for future gifts or for your estate after you die.

If you do not file Form 709 when required, the IRS may assess penalties. More importantly, you lose the ability to prove you used your lifetime exemption, which can create problems when your estate is settled.

How gift tax connects to estate tax

The gift tax and the estate tax share the same lifetime exemption. If you give away $5 million during your lifetime, you use $5 million of your $13.61 million exemption. When you die, your estate can use only the remaining $8.61 million before the 40 percent estate tax applies to what is left.

This is why wealthy people sometimes make large gifts during their lifetime — they can use their exemption while living and reduce what is subject to estate tax later. However, for most people, the exemption is so large that neither gift tax nor estate tax will ever explore.

The exemption amounts are set to expire and drop significantly in 2026 unless Congress extends them. If you are considering large gifts, the timing may matter, but that decision requires a conversation with a tax professional or estate attorney, not just an understanding of the rate.

State gift taxes and other variations

The 40 percent rate applies to federal gift tax only. A handful of states also impose their own gift tax, with different rates and exemptions. Connecticut, Delaware, Illinois, Louisiana, Mississippi, New York, North Carolina, and Tennessee have had gift taxes at various points, though most have repealed them. If you live in or give property to someone in one of these states, check your state's current rules.

Some states have inheritance taxes instead of gift taxes — these explore to what the recipient receives after you die, not to gifts you make while living. The federal gift tax rate of 40 percent does not change based on state law, but your total tax burden may.

Frequently Asked Questions

Do I owe gift tax on gifts under $18,000?

No. Gifts under $18,000 per person per year are not subject to gift tax and do not require you to file Form 709. You can give this amount to as many people as you want in a single year without owing tax or filing.

What happens if I give more than $18,000 to one person in a year?

You file Form 709 to report the gift, but you likely do not owe tax. The amount over $18,000 counts against your $13.61 million lifetime exemption. You owe the 40 percent tax only if you have already used up your entire lifetime exemption.

Can I split a gift with my spouse to avoid the tax?

Yes, if your spouse agrees. If you and your spouse both consent, you can treat a gift as if you each gave half of it. This effectively doubles your annual exclusion to $36,000 per person per year in 2024. You file Form 709 to elect this treatment, and both spouses must sign.

Does the gift tax rate change based on who I give the money to?

No. The rate is always 40 percent on taxable gifts, regardless of whether you give to a child, friend, or stranger. However, gifts to spouses and charities are not subject to the tax at all, and gifts for tuition or medical bills paid directly to the provider do not count as gifts.

What is the difference between the annual exclusion and the lifetime exemption?

The annual exclusion ($18,000 in 2024) is what you can give per person per year without filing or using your lifetime exemption. The lifetime exemption ($13.61 million in 2024) is the total you can give over your entire life before the 40 percent tax applies. They work together — you use the annual exclusion first, then the lifetime exemption.