What is the gift tax? A 101 guide

Imagine giving a loved one a substantial gift, only to find out you owe the federal government a tax on your generosity.

It might come as a surprise, but that’s exactly what the gift tax entails.

Whether you’re giving cash, stock, real estate or other valuables, understanding the gift tax and what it may mean for you is key to ensuring your generosity doesn’t come with unexpected consequences.

So what is the gift tax, and how much can you gift tax-free? Let’s break it down.

What is the gift tax?

The IRS defines the gift tax as “a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether or not the donor intends the transfer to be a gift. A gift is a transfer of property from one individual to another, where the person giving the gift doesn’t expect to receive something of at least equal value in return.”

In simpler terms, the gift tax is a federal transfer tax individuals must report to the IRS when they give a gift to another person that exceeds a certain amount. When they gift an amount overall that exceeds their lifetime exemption, they may then need to pay the gift tax.

So what exactly might be considered a “gift”?

A common gift under these tax regulations is cash. However, it could also be a security (like stocks or bonds), real estate, a vehicle or art. The gift tax limit isn’t designed to impact smaller, everyday gestures of generosity – instead, it’s a way to prevent individuals from transferring wealth in an attempt to sidestep the estate tax.

In most cases, medical and educational expenses (such as tuition) are excluded but must be paid directly to the institutions, as are gifts or donations to political or charitable organizations, and gifts to spouses.

How the gift tax works

The person giving the gift is the person who reports it on a gift tax return (IRS Form 709) and pays the gift tax – unless the gift qualifies for an exemption or exclusion. In that case, a return may still need to be filed, but there would be no tax to pay.

The form is due on the same date as the person’s income tax returns the year following the one the gift was made. The person receiving the gift normally doesn’t have to report the gift on their tax return or pay taxes on the gift.

How much is the gift tax?

Like federal income tax rates, federal gift tax rates are marginal, meaning the larger the gift is, the more the gift giver will pay in taxes.

For example, if your gift exceeds the annual gift tax exemption limit by $0 to $10,000, you’ll pay a gift tax rate of 18%. After that, the tax rate increases as follows:

Gift tax exclusion details

Again, the gift tax was established to prevent taxpayers from giving money and other valuable items to others as a way to avoid certain taxes – not to interfere with people giving one another small gifts.

For this reason, the gift tax applies only to gifts above a certain value. Gifts below these values are excluded from the gift tax.

Gift tax annual exclusion amount

The annual exclusion per recipient for 2025 is $19,000. The limit is $38,000 for married couples who elect to split gifts.

The $19,000 limit applies to each recipient, meaning one person can give gifts worth up to $19,000 to multiple recipients without reporting the gifts to the IRS. This amount – known as the annual exclusion – renews every year and is indexed for inflation.

Gift tax lifetime exclusion

Giving a gift over the annual exclusion amount to a single recipient triggers the need to report the gift to the IRS, but it doesn’t trigger needing to pay tax on the gift. That’s where the gift tax lifetime exclusion comes in. In 2025, the limit on the total value of gifts that an individual can give over their lifetime is $13.99 million.

This means a person can give gifts worth up to this amount before any gift tax is due. This lifetime exemption from gift tax is per donor, not per recipient, and is adjusted annually for inflation. Each spouse of a married couple has their own lifetime exemption.

Certain types of gifts are excluded from gift tax altogether and don’t even count against the annual exclusion.

For example, paying someone’s school tuition directly to a school or medical bills directly to a doctor or hospital doesn’t count as a gift. Gifts to certain charities and to political organizations are also generally not subject to gift tax rules.

Additionally, gifts to a person’s spouse typically aren’t subject to gift tax either (as long as the spouse is a U.S. citizen).

How to get the maximum benefit from the annual exclusion

Two of the most common strategies to use the annual exclusion creatively are:

Gift splitting

Married couples sometimes want to make a joint gift using each of their annual exclusions, but sometimes, the couple doesn’t have joint assets.

“Gift splitting” allows one spouse to make a gift with their separate property and use the other spouse’s annual exclusion to shelter the entire gift from tax. The other spouse has to sign the gift tax return consenting to this “gift splitting.”

Gifts in trust

Sometimes, people want to make a gift to another person using a trust, which can help protect those assets for the beneficiaries’ use.

Gifts to trusts may qualify for the annual exclusion. Gift trusts, sometimes called “Crummey Trusts”, may be used to give gifts in trust while still allowing those gifts to qualify for the annual exclusion.

How to potentially avoid the gift tax

Gifts of large amounts may be subject to the gift tax, but there are ways you can (legally) reduce your tax liability:

Respect the limits

If you’d like to give a gift, but don’t necessarily need to do it all at once, in a single lump sum, you might consider spreading it out. Give $15,000 one year, and $15,000 the next, rather than $30,000 all in one year.

You won’t need to report the gift if it’s under the annual exclusion limit, so this strategy may reduce your tax obligation.

Lean on your spouse

Are you married? If so, you can contribute more as a couple than you can individually. Say you want to give more than the limit to a family friend to help them pay for a downpayment on a home. Alone, you can contribute $19,000 and under without triggering needing to report the gift, but by having your spouse also gift a contribution, you can up the amount you can gift without needing to report the gift.

Provide medical or educational gifts directly

You don’t need to pay gift tax on money used for medical purposes, but the caveat here is the money needs to be paid directly to where it’s owed (for example, the insurance company or medical institution).

If you give the money to the recipient to then pay the bills themselves, the money may be funneled to pay medical bills, but this gift may trigger the gift tax.

The same applies to gift givers funding educational expenses. Gifts made directly to a school or university are excluded from the gift tax.

The bottom line

Many people who give and receive small gifts during their lifetime will most likely not have to worry about the gift tax. However, if you’re planning to give or receive high-value gifts, it may be important to think about the gift tax.

Everyone's situation is different, so you may want to speak to a tax professional and a trust and estates lawyer, if necessary, about creating an appropriate gifting strategy.

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