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

The federal gift tax applies only to gifts above a yearly threshold. For 2024, you can give up to $18,000 per person per year without filing any paperwork or owing tax. If you give more than that to one person in a single year, you file Form 709 with the IRS — but you still may not owe money. The tax itself is 40%, but it only kicks in after you have exhausted your lifetime exemption, which is $13.61 million as of 2024.

Most people never hit that lifetime number. The yearly threshold resets January 1 each year, so you can give $18,000 to your child, $18,000 to your spouse, $18,000 to your sibling, and so on, all in the same year, with no tax consequence. Married couples filing jointly can give $36,000 per recipient per year.

State gift tax is separate and rarer. Only a handful of states impose their own gift tax — Iowa, Kentucky, Maryland, New Jersey, Pennsylvania, and Tennessee — and the rules vary by state. If you live in one of those states, you may owe state tax even if you owe nothing to the federal government.

Key Takeaways

  • You can give $18,000 per person per year (2024) without filing Form 709 or owing any tax.
  • Gifts above the yearly threshold require you to file Form 709, but you still owe no tax unless you have already used your $13.61 million lifetime exemption.
  • The 40% tax rate only applies to gifts that exceed both the yearly threshold and your lifetime exemption combined.
  • Married couples can give $36,000 per recipient per year by combining their yearly thresholds.
  • Six states impose their own gift tax on top of federal rules, so check your state's rules if you live in Iowa, Kentucky, Maryland, New Jersey, Pennsylvania, or Tennessee.

How the yearly threshold works

The yearly threshold is $18,000 per recipient for 2024. This means you can give $18,000 to one person, or $18,000 each to ten different people, and you owe nothing. The threshold applies to each recipient separately — it is not a total cap on all your giving.

Gifts that count toward the threshold include cash, property, investments, and anything else of value. Gifts that do not count include tuition paid directly to a school, medical expenses paid directly to a provider, gifts to a spouse, and gifts to a political organization. If you pay your grandchild's college tuition directly to the university, that payment does not use up your yearly threshold, even if it is $50,000.

The threshold changes most years. It is tied to inflation and rounds to the nearest $1,000. In 2023 it was $17,000; in 2024 it is $18,000. The IRS announces the new threshold in October or November of the prior year.

When you have to file Form 709

You file Form 709 (United States Gift and Generation-Skipping Transfer Tax Return) when you give more than the yearly threshold to a single person in a single calendar year. You file it with your federal income tax return, or separately if you do not file an income tax return that year. The deadline is April 15 of the following year, the same as your income tax return.

Filing Form 709 does not mean you owe tax. It means you are reporting the gift to the IRS and using part of your lifetime exemption. The form tells the IRS that you gave $25,000 to your daughter, for example, and that $7,000 of it counts against your $13.61 million lifetime exemption. You still owe nothing in tax.

If you do not file Form 709 when you should, the IRS may assess penalties. The penalty is usually 5% per month of the unpaid tax, up to 25% total, but since most people owe no tax, the penalty is often $0. However, failing to file can also shorten the statute of limitations on the gift, which affects your estate later. It is safer to file.

The lifetime exemption and when the 40% rate applies

Every U.S. citizen has a lifetime exemption — a total amount you can give away over your entire life without owing gift or estate tax. For 2024, that exemption is $13.61 million. When you file Form 709 to report a gift above the yearly threshold, you are using up part of that exemption.

The 40% tax rate applies only when you have used up your entire lifetime exemption and continue to give. If you have given away $13.61 million over your lifetime and then give another $1,000 to your grandchild, that $1,000 is taxed at 40%. You owe $400 in tax.

The lifetime exemption is scheduled to drop on January 1, 2026. Unless Congress acts, it will fall to roughly $7 million per person (adjusted for inflation). This is a major reason some people accelerate large gifts in 2024 and 2025 — they want to use the higher exemption while it lasts. But for most households, the exemption is so large that it will never matter.

Married couples and gift splitting

If you are married, you and your spouse can combine your yearly thresholds through a process called gift splitting. This means you can give $36,000 per recipient per year (2024) instead of $18,000 each. You both have to agree to split, and you both file Form 709 if the gift exceeds the combined threshold.

Gift splitting is useful when one spouse has significantly more income or assets than the other. It lets you move money between spouses and then to third parties without using up the higher-earning spouse's lifetime exemption as quickly. You do not have to split every gift — you can split some and not others in the same year.

If you are divorced or widowed, you cannot use gift splitting. You are limited to your own yearly threshold and lifetime exemption.

State gift tax rules

Six states tax gifts: Iowa, Kentucky, Maryland, New Jersey, Pennsylvania, and Tennessee. The rules are different in each state. Some states use the same yearly threshold as the federal government; others have lower thresholds or different definitions of what counts as a gift.

Iowa, for example, taxes gifts to anyone except a spouse, parent, or child. Kentucky taxes gifts to anyone except a spouse. Maryland taxes gifts to anyone except a spouse or lineal descendant (child, grandchild, parent, grandparent). New Jersey taxes gifts to anyone except a spouse or lineal descendant. Pennsylvania taxes gifts to anyone except a spouse. Tennessee taxes gifts to anyone except a spouse or lineal descendant.

If you live in one of these states and make a large gift, you may owe state tax even if you owe nothing to the federal government. You file a state gift tax return in addition to Form 709. The rates and thresholds vary, so contact your state tax authority or a tax professional if you live in one of these states and plan to give more than $18,000 to someone in a year.

Gifts that are not taxed

Certain gifts are exempt from gift tax entirely, no matter the amount. These include tuition or medical expenses paid directly to the provider, gifts to a spouse, gifts to a political organization, and gifts to a charity. If you pay your grandchild's medical bills directly to the hospital, that is not a taxable gift, even if it is $100,000.

Gifts to a spouse who is a U.S. citizen are unlimited and never taxed. If your spouse is not a U.S. citizen, the yearly threshold is lower ($18,000 in 2024, but it may be different in your year). Gifts to a political candidate or committee are not taxed, but they may be subject to campaign finance limits instead.

Charitable gifts are not taxed, but you must give to a may have access to charity. The IRS maintains a searchable database of may have access to charities on its website. If you give to an organization that is not on the list, the gift may be taxable.

Frequently Asked Questions

Do I owe gift tax if I give money to my adult child?

Not if you give $18,000 or less per year. If you give more than $18,000 in a single calendar year, you file Form 709 but still owe no tax, because the excess counts against your $13.61 million lifetime exemption. You only owe tax if you have already used up your entire lifetime exemption and continue to give.

What if I give a gift and do not report it to the IRS?

If the gift is under $18,000 per recipient per year, you do not have to report it. If it is over, you should file Form 709 to avoid penalties and to properly document the gift for your estate. The IRS does not typically know about gifts unless you report them or the recipient reports them, but failing to file can cause problems later when your estate is settled.

Does gift tax apply to loans I give to family members?

A loan is not a gift if you charge interest and have a written agreement. If you lend money to a family member with no interest and no repayment terms, the IRS may treat it as a gift. To be safe, charge at least the IRS minimum interest rate (the Applicable Federal Rate, or AFR) and document the loan in writing.

Can I give away my entire lifetime exemption before I die?

Yes. Many people give away large amounts during their lifetime to reduce their taxable estate. Each gift you make uses up part of your $13.61 million exemption. When you die, your estate can use only the remaining exemption. This is a common estate planning strategy, but it requires careful record-keeping and usually the help of a tax professional or attorney.

What happens to my lifetime exemption if I do not use it?

If you die without using your entire lifetime exemption, the unused amount carries over to your estate. Your estate can then use it to reduce estate tax. However, the exemption is scheduled to drop in 2026, so the amount available to your estate may be lower than it is today.