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

The federal gift tax applies a flat rate of 40 percent to gifts above a certain threshold. However, the threshold is high enough that the vast majority of people giving gifts never owe this tax. The tax applies only to the amount by which your lifetime gifts exceed $13.61 million (as of 2024). That figure changes each year based on inflation.

The key distinction: you do not pay tax on the gift itself. You pay tax only on the portion of your lifetime giving that exceeds the exemption. If you give $50,000 to a family member and your lifetime total is still under $13.61 million, you owe nothing. The 40 percent rate applies only to the excess above that threshold.

The exemption amount is indexed annually for inflation, so it will be different in 2025 and beyond. The IRS publishes the current year's amount in late October or early November of the prior year.

Key Takeaways

  • The federal gift tax rate is 40 percent, but it applies only to gifts exceeding $13.61 million in your lifetime (2024 figure, adjusted yearly for inflation).
  • Annual gifts of up to $18,000 per recipient (2024) do not count toward your lifetime limit and are never taxed, regardless of how many people you give to.
  • Gifts to spouses who are U.S. citizens and gifts to charities are unlimited and never taxed under federal law.
  • You must file a gift tax return (Form 709) if you exceed the annual limit in a single year, even if you owe no tax.
  • State gift taxes exist in only a few states and operate independently of the federal tax.

Annual gifts that never trigger the tax

The federal government allows you to give up to $18,000 per person per year (2024) without any tax consequence. This amount is called the annual exclusion. You can give this amount to as many people as you want in a single year, and none of it counts toward your lifetime exemption.

If you are married and your spouse agrees, you can each give $18,000 to the same person in the same year, totaling $36,000, with no tax filing required. This is called gift splitting. The annual exclusion amount also increases with inflation, so it will be higher in future years.

Gifts that may have access to for the annual exclusion include cash, property, investments, and tuition paid directly to a school. Medical expenses paid directly to a provider also do not count as gifts for tax purposes, even if they exceed the annual limit.

Lifetime exemption and how it works with your estate

Your lifetime gift exemption and your estate tax exemption are linked. The $13.61 million (2024) is a combined pool. If you use $5 million of it during your lifetime by giving large gifts, your estate will have only $8.61 million remaining to pass tax-free when you die.

This linkage matters because the exemption amount is scheduled to drop significantly after 2025. Unless Congress acts, the exemption will fall to approximately $7 million per person in 2026. If you are considering large gifts, the timing affects how much of your exemption you use now versus how much remains for your estate.

You do not owe tax when you file a gift tax return. Filing the return simply reports that you have used part of your lifetime exemption. The tax itself is owed only if your lifetime gifts exceed the full exemption amount.

Gifts that are never taxed, no matter the amount

Certain gifts fall outside the gift tax system entirely. Gifts to your spouse (if your spouse is a U.S. citizen) are unlimited and never taxed. Gifts to charities that hold a 501(c)(3) status or equivalent are also unlimited and never taxed. Political contributions to candidates and committees are treated as gifts but are not subject to gift tax.

Payments made on behalf of someone else for tuition or medical care are not treated as gifts if you pay the provider directly. For example, if you pay your grandchild's college tuition directly to the university, that payment does not count as a gift and does not reduce your exemption. The same applies to medical bills paid directly to a hospital or doctor.

What happens if you exceed the limit

If you give more than $18,000 to a single person in one year, you must file Form 709 (United States Gift Tax Return) with the IRS, even if you owe no tax. Filing this form reports the excess gift and reduces your lifetime exemption by that amount.

You do not send money to the IRS when you file Form 709 unless your lifetime gifts have actually exceeded $13.61 million. The form simply documents that you have used part of your exemption. The tax becomes due only if your cumulative lifetime gifts surpass the full exemption threshold.

If you fail to file Form 709 when required, the IRS may assess penalties and interest. The deadline to file is April 15 of the year following the gift, with the same extension options available as for income tax returns.

State gift taxes and how they differ

Only a handful of states impose their own gift tax: Connecticut, Delaware, Illinois, Louisiana, Mississippi, North Carolina, and Tennessee. Each state sets its own exemption and rate, independent of the federal system. If you live in or give property in one of these states, you may owe state gift tax even if you owe nothing to the federal government.

State exemptions are typically much lower than the federal exemption. Some states have exemptions as low as $1 million or less. If you are making large gifts and live in a state with a gift tax, you should research that state's rules separately, as they do not automatically follow federal thresholds.

Most states do not have a gift tax. If you live in a state without one, you have no state gift tax obligation, though you must still follow federal rules.

Frequently Asked Questions

Do I have to report gifts to the IRS every year?

You must file Form 709 only if you give more than $18,000 to one person in a single year (2024). Gifts within the annual exclusion require no filing. If you stay under the annual limit to each recipient, you report nothing to the IRS.

If I give my child $50,000, do I owe $20,000 in tax?

No. You owe tax only if your lifetime gifts exceed $13.61 million. A $50,000 gift reduces your remaining exemption but does not trigger a tax bill. You would file Form 709 to report the excess over the annual exclusion, but you would owe no tax unless your total lifetime gifts eventually surpass $13.61 million.

Can my spouse and I each give $18,000 to our grandchild without filing?

Yes. If you both give $18,000 to the same grandchild in the same year, that is $36,000 total, and neither of you files. Each person's annual exclusion is separate. This is called gift splitting and requires no special paperwork if you stay within the annual limit.

What if I give money to help pay someone's mortgage or rent?

Money given to help with mortgage or rent payments is treated as a gift to that person. It counts toward the annual exclusion and lifetime exemption. Unlike tuition or medical bills, there is no exception for housing costs, so a $50,000 gift toward rent would exceed the annual limit and require Form 709.

Does the gift tax apply to inheritances?

No. Inheritances are subject to estate tax, not gift tax. These are two separate taxes with separate exemptions. Gifts you make during your lifetime and property you leave at death are taxed under different rules, though they share a combined exemption pool.