Gift Tax

Key Takeaways
* The federal gift tax applies to transfers of money or property made without full consideration when those transfers exceed annual or lifetime exclusions.
* For tax year 2025: annual exclusion is $19,000 per recipient; lifetime gift (and estate) tax exclusion is $13.99 million.
* Gifts over the annual exclusion generally must be reported on IRS Form 709; the donor—not the recipient—is responsible for gift tax liability.
* Certain transfers (direct tuition or medical payments, gifts to a spouse, and qualified 529 plan contributions with a five‑year election) are exempt or treated specially.

What is the gift tax?

The gift tax is a federal tax on transfers of money or property when the donor receives nothing (or less than full value) in return. It prevents individuals from avoiding estate taxes by giving away assets before death. Tax liability arises only after gifts exceed the applicable exclusions.

What counts as a gift?

A gift is any transfer of value made without adequate compensation. Typical examples include:
* Cash
* Real estate
* Stocks and other investments
* Personal property and collectibles

Valuation for non‑cash gifts is based on fair market value (FMV) at the time of transfer.

IRS limits (tax year 2025)

• Annual exclusion: $19,000 per recipient. Gifts at or below this amount per recipient generally do not need to be reported and do not reduce your lifetime exclusion.
• Lifetime exclusion: $13.99 million. Gifts that cumulatively exceed this amount over a donor’s lifetime may be subject to gift tax.
  These thresholds are adjusted periodically for inflation.

Reporting and deadlines

• Gifts above the annual exclusion must be reported by the donor on IRS Form 709, United States Gift (and Generation‑Skipping Transfer) Tax Return.
• Form 709 is filed with your federal tax return by the filing deadline for the year following the gift (typically April 15).
• Even if no gift tax is owed because of the lifetime exemption, Form 709 is used to track amounts that reduce that exemption.

Who pays the tax?

The donor (person who gives the gift) is responsible for filing Form 709 and paying any gift tax due. Recipients do not pay gift tax and generally do not report gifts as income.

Gift tax rates

Gift tax is progressive, with marginal rates ranging roughly from 18% to 40% on taxable amounts that exceed the lifetime exclusion. For generation‑skipping transfers (gifts to individuals at least 37½ years younger), a separate GST tax at a 40% rate may apply, subject to a generation‑skipping exemption (tied to the lifetime exclusion).

Common exemptions and exceptions

• Spousal transfers: Gifts between U.S. citizen spouses are generally unlimited and tax‑free.
• Direct payments for tuition or medical expenses: Payments made directly to qualifying institutions for someone else’s tuition or to providers for medical care are excluded.
• 529 college savings plans: Contributions can qualify for a special election that treats a lump contribution as spread over five years of annual exclusions (e.g., 5 × $19,000). You must file Form 709 to elect this and may not make additional gifts to the same beneficiary during the five‑year period without using annual exclusions.
• Small gifts within the annual exclusion and certain transfers to political organizations or charities are exempt.

Strategies to manage gift‑tax exposure

• Gift splitting: Married couples can combine their annual exclusions to give up to $38,000 to a single recipient in 2025 without reducing either spouse’s lifetime exclusion.
• Trusts: Certain trusts (e.g., Crummey trusts) can be structured so beneficiaries have a present interest and qualify for the annual exclusion while keeping assets in trust.
• Use of exclusions: Make direct tuition/medical payments or use the 529 five‑year election to transfer larger amounts without tapping the lifetime exemption.

Examples

• A donor gives $20,000 to each of five people in a year when the annual exclusion is $18,000. The $2,000 excess per recipient ($10,000 total) must be reported and reduces the donor’s lifetime exclusion.
• A grandfather pays $20,000 directly to a university for his grandchild’s tuition and separately gives $18,000 in cash for living expenses. The tuition payment is excluded; the $18,000 falls within the annual exclusion and is not reportable.

Bottom line

The gift tax is designed to limit tax avoidance via lifetime transfers. Annual exclusions allow modest transfers tax‑free, while the large lifetime exclusion shields substantial transfers from immediate tax but must be tracked on Form 709 when exceeded. Plan gifts deliberately—using exclusions, spousal strategies, education or medical exclusions, and appropriate trust structures—to minimize tax consequences and preserve estate tax exemptions.