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 people giving gifts during their lifetime will never owe gift tax at all. The tax applies only to the amount you give that exceeds your lifetime exemption, which is $13.61 million per person in 2024 (this number changes each year based on inflation).

Think of it this way: you have a bucket of $13.61 million. Every gift you make uses up part of that bucket. Once the bucket is empty, any gifts you make after that are taxed at 40 percent. For most households, that bucket never empties during their lifetime.

The confusion usually comes from mixing up gift tax with reporting requirements. You may have to report a gift to the IRS even if you do not owe tax on it. Reporting and owing tax are two different things.

Key Takeaways

  • The federal gift tax rate is 40 percent, but it only applies to gifts above your lifetime exemption of $13.61 million per person in 2024.
  • You can give up to $18,000 per person per year (in 2024) without reporting the gift or using any of your lifetime exemption.
  • Gifts to spouses and to charities are never taxed, no matter the amount.
  • State gift taxes exist in only a few states and have their own rates and exemptions separate from federal tax.
  • The lifetime exemption amount changes each year with inflation, so the threshold you need to watch varies annually.

Annual exclusion gifts that do not count toward your exemption

The IRS lets you give away money each year without it counting against your $13.61 million lifetime bucket. This is called the annual exclusion. In 2024, you can give up to $18,000 per person per year without reporting it or using any of your exemption.

This means 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 touches your lifetime exemption. If you are married, your spouse can do the same thing, so together you can give $36,000 per person per year.

The annual exclusion amount changes most years. It was $17,000 in 2023 and will likely be $19,000 in 2025. The IRS adjusts it for inflation in $1,000 increments. If you give more than the annual exclusion to one person in a year, you have to file Form 709 with the IRS, but you still may not owe tax—you are just reporting that you used part of your lifetime exemption.

Gifts that are never taxed, no matter the size

Some gifts are completely exempt from gift tax regardless of amount. Gifts to your spouse (if your spouse is a U.S. citizen) are never taxed. You can give your spouse $1 million or $10 million and owe nothing. Gifts to charities that are registered with the IRS are also never taxed.

Payments made directly to a medical provider for someone else's medical care are not considered gifts and are not taxed. The same applies to tuition paid directly to a school on behalf of someone else. These have to go straight to the provider or school—if you give the money to the person and they pay the bill, it counts as a regular gift.

When you actually owe the 40 percent tax

You owe the 40 percent gift tax only when you have exhausted your $13.61 million lifetime exemption and you give away more money. This is extremely rare. You would have to give away more than $13.61 million in total gifts during your lifetime to trigger the tax.

If you did hit that threshold and gave away another $100,000, you would owe $40,000 in gift tax on that $100,000 (40 percent of $100,000). The person receiving the gift does not owe income tax on it—the person giving it owes the gift tax.

Because the exemption is so high and resets partially at death (your heirs get their own exemption), most people never encounter this tax in practice. It is designed to prevent extreme wealth concentration across generations, not to tax ordinary family gifts.

State gift tax rates, where they exist

Only a handful of states have their own gift tax: Connecticut, Delaware, Illinois, Louisiana, Mississippi, North Carolina, and Tennessee. Each state sets its own rate and exemption. Connecticut's rate ranges from 3.06 percent to 12 percent depending on the size of the gift. Delaware's rate is 2.25 percent to 16 percent. These are separate from federal tax—you could owe both state and federal tax on the same gift, or only one, depending on where you live and the size of the gift.

Most states do not have a gift tax at all. If you live in a state without one, you only deal with federal rules. If you move to a different state, the rules that explore depend on your state of residence at the time you make the gift.

How the lifetime exemption works with estate tax

Your $13.61 million lifetime exemption for gifts is linked to your estate tax exemption. If you give away $5 million during your lifetime, your estate exemption shrinks to $8.61 million. When you die, your estate can use whatever exemption is left to pass money to heirs tax-free.

This is why some people with large estates choose to give money away during their lifetime—they use their exemption while they are alive rather than letting it sit unused. Others do the opposite and save the exemption for their estate. The choice depends on your situation and whether you expect the exemption to change (it is set to drop significantly in 2026 unless Congress acts).

Reporting gifts on Form 709

If you give more than $18,000 to one person in a year, you must file Form 709 (United States Gift and Generation-Skipping Transfer Tax Return) with your tax return. Filing this form does not mean you owe tax—it means you are reporting that you used part of your lifetime exemption.

You file Form 709 for the year in which you made the gift. If you gave $25,000 to your daughter in 2024, you would file Form 709 with your 2024 tax return (due April 15, 2025). The form asks for details about the gift: who received it, how much it was, and the date. The IRS uses this to track how much of your lifetime exemption you have used.

Frequently Asked Questions

Do I owe gift tax if I give my child money for a down payment on a house?

Not if the gift is $18,000 or less per year. If it is more than $18,000, you must report it on Form 709, but you still do not owe tax—you are just using part of your lifetime exemption. You only owe the 40 percent tax if your total lifetime gifts exceed $13.61 million.

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

If the money comes back as a loan, it is not a gift. But you need a written loan agreement with a stated interest rate and repayment schedule. Without documentation, the IRS may treat the repayment as a separate gift. If you are lending money to family, put the terms in writing to avoid confusion.

Does my spouse's gifts count toward my exemption or theirs?

Each person has their own $13.61 million lifetime exemption. Your spouse's gifts do not count against yours. If you are married and give $25,000 to your child together, you can split it so you each report $12,500, keeping both of you under the annual exclusion.

What happens to my exemption if I move to a state with gift tax?

Your federal exemption stays the same. But you may now owe state gift tax on gifts you make while living in that state. State and federal rules are separate. You would need to check your new state's specific rules and exemptions.

If I give away $13.61 million now, can my heirs still inherit tax-free?

No. Your lifetime exemption and your estate exemption are linked. If you use all $13.61 million during your lifetime, your estate exemption is reduced to zero, and your heirs would owe estate tax on anything they inherit above that point. This is why the timing of gifts matters for large estates.