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

The federal gift tax is a 40 percent tax on money or property you give away during your lifetime. However, you only owe it if you exceed a threshold called the annual exclusion and a separate lifetime limit called the lifetime exemption. For 2024, you can give up to $18,000 per person per year without triggering any tax or paperwork. If you give more than that to one person in a single year, you file a form but typically still owe no tax — the excess counts against your lifetime exemption instead.

The lifetime exemption is much larger: $13.61 million per person in 2024. This means you would need to give away more than $13.61 million over your entire life (beyond the annual exclusions) before you actually owe a single dollar in gift tax. Most people never reach that threshold. The exemption amount changes each year based on inflation and will drop significantly in 2026 unless Congress acts.

State gift taxes are separate and far less common. Only a handful of states have their own gift tax, and the rules vary by state. If you live in one of those states, you may owe state tax on gifts even if you owe no federal tax.

Key Takeaways

  • The federal gift tax rate is 40 percent, but it only applies to gifts above $13.61 million per person over your lifetime.
  • You can give $18,000 per person per year in 2024 with no tax or filing requirement; amounts above that require a form but usually no payment.
  • Gifts to spouses, charities, and for medical or education expenses are exempt from gift tax regardless of amount.
  • The lifetime exemption drops to roughly $7 million per person in 2026 unless Congress changes the law.
  • A handful of states have their own gift tax; check your state's rules if you live in one.

Annual exclusion: the $18,000 per person per year threshold

The annual exclusion is the amount you can give to any one person in a calendar year without filing a gift tax return or using any of your lifetime exemption. For 2024, that amount is $18,000 per recipient. This means you can give $18,000 to your child, $18,000 to your grandchild, $18,000 to a friend, and $18,000 to another friend — all in the same year — and owe no tax and file no forms.

The annual exclusion applies per person, not per gift. You could give $18,000 in one lump sum or $1,500 per month; either way, it counts as one gift to that person for that year. If you are married, both you and your spouse have separate annual exclusions. A married couple can therefore give $36,000 per person per year ($18,000 each) without any tax consequence.

The annual exclusion amount increases every few years when inflation hits certain thresholds. In 2023 it was $17,000; in 2024 it rose to $18,000. The IRS announces the new amount in October or November of the prior year.

Lifetime exemption: the $13.61 million cap

If you give more than $18,000 to one person in a year, the excess does not immediately trigger a tax bill. Instead, it counts against your lifetime exemption, which is $13.61 million per person in 2024. You file a form (Form 709) to report the overage, but you owe no tax as long as your total lifetime gifts stay under $13.61 million.

Think of the lifetime exemption as a bucket. Every gift above the annual exclusion removes money from that bucket. Once the bucket is empty — once your lifetime gifts exceed $13.61 million — any additional gifts trigger the 40 percent tax. For most people, that bucket never empties.

The lifetime exemption is tied to inflation and changes annually. It was $12.92 million in 2023 and $13.61 million in 2024. However, the exemption is scheduled to drop to roughly $7 million per person on January 1, 2026, unless Congress passes new legislation. This "sunset" is built into current tax law.

Gifts that are never taxed, no matter the amount

Certain gifts are completely exempt from gift tax and do not count against your annual exclusion or lifetime exemption. The most common are gifts to your spouse (if your spouse is a U.S. citizen), gifts to charities, and gifts paid directly to a medical provider or school on someone else's behalf.

If you pay a doctor's bill or hospital bill directly to the provider for someone else, that payment is not a taxable gift. The same applies to tuition: if you pay a school or university directly for someone's education, it does not trigger gift tax, even if you pay $100,000 or more. The key is that you pay the provider directly, not the person.

Gifts to political organizations and certain other entities also escape gift tax. If you are unsure whether a particular gift is exempt, the IRS website lists the full rules, or you can consult a tax professional.

When you actually owe the 40 percent tax

You owe the 40 percent gift tax only when your total lifetime gifts (minus annual exclusions and exempt gifts) exceed $13.61 million. At that point, every additional dollar you give away is taxed at 40 percent. For example, if you have given away $13.62 million over your lifetime, you owe 40 percent tax on that extra $10,000 — which is $4,000.

The tax is typically paid when you file your income tax return for the year in which you made the large gift. You calculate the tax on Form 709 and pay it along with your regular income taxes. The person receiving the gift does not pay the tax; the giver does.

Because the lifetime exemption is so high and adjusted for inflation each year, the gift tax affects only the wealthiest Americans. In recent years, fewer than 10,000 gift tax returns are filed annually, and even fewer result in actual tax owed.

State gift taxes: a separate set of rules

Only a small number of states have their own gift tax. As of 2024, Connecticut, Delaware, Illinois, Louisiana, Mississippi, North Carolina, and Tennessee have gift taxes or inheritance taxes that may apply to gifts. The rules and thresholds vary significantly by state.

For example, some states tax gifts only from residents, while others tax gifts to residents. Some have annual exclusions similar to the federal rule; others do not. If you live in or give to someone in one of these states, you should research that state's specific rules or consult a tax professional, because state tax can apply even if you owe no federal gift tax.

Most states have no gift tax at all. If you live in a state without a gift tax, you only need to worry about the federal rules.

Filing Form 709 when you exceed the annual exclusion

If you give more than $18,000 to one person in a single year, you must file Form 709 (United States Gift and Generation-Skipping Transfer Tax Return) with your federal income tax return. This is true even if you owe no tax, because the excess counts against your lifetime exemption.

You file Form 709 for the year in which you made the gift. For example, if you gave $25,000 to your daughter in 2024, you file Form 709 with your 2024 tax return (due April 15, 2025). The form lists each gift, the recipient, the date, and the amount. You calculate whether any tax is owed based on your lifetime exemption balance.

If you are married and your spouse also made gifts that year, you may be able to "split" gifts — treating each gift as if both spouses made it — which can help you stay under the annual exclusion. This requires both spouses to consent and is reported on Form 709.

The 2026 exemption drop and what it means

The lifetime exemption is scheduled to fall from $13.61 million to approximately $7 million per person on January 1, 2026. This is not a change in the tax rate (still 40 percent) but a dramatic reduction in the threshold at which the tax kicks in. Congress built this "sunset" into tax law in 2017 and has not changed it.

If Congress does not act before 2026, the exemption will drop unless new legislation extends it. This could affect people with large estates or those planning to give away significant sums. If you have substantial assets and are considering large gifts, a tax professional can help you understand whether timing matters for your situation.

For most people, even the reduced exemption of $7 million is high enough that gift tax remains unlikely. However, wealthy individuals and families should monitor this change and plan accordingly.

Frequently Asked Questions

Do I have to report gifts under $18,000?

No. Gifts under $18,000 per person per year require no form and no report. You simply give the money or property, and that is the end of it. Only gifts above $18,000 to a single person in a single year require you to file Form 709.

If I give my child $25,000, do I owe tax right now?

No. The $7,000 overage counts against your $13.61 million lifetime exemption, but you owe no tax unless and until your total lifetime gifts exceed that exemption. You do file Form 709 to report the overage, but no payment is due.

Can my spouse and I give $36,000 to our child without any paperwork?

Yes. Each spouse has a separate $18,000 annual exclusion. If you both give to the same child in the same year, you can give $18,000 each ($36,000 total) with no forms or tax consequences.

What if I pay my grandchild's college tuition directly to the university?

That payment is not a taxable gift, no matter how much it is. Tuition paid directly to an educational institution is exempt from gift tax. You could pay $100,000 in tuition and owe no gift tax, as long as you pay the school directly.

Will the gift tax exemption really drop in 2026?

It is scheduled to drop unless Congress changes the law. The current exemption of $13.61 million is set to fall to roughly $7 million per person on January 1, 2026. Congress could extend the higher exemption, but as of now, no action has been taken.