The federal gift tax rate is a flat 40 percent on gifts above the annual exclusion amount

The gift tax rate is the percentage of tax you owe on money or property you give to someone else, but only if that gift exceeds certain thresholds. The federal rate is a flat 40 percent. However, most people never pay it because the IRS allows you to give away a large amount before any tax applies.

The key to understanding gift tax is that it is not about the size of a single gift—it is about how much you have given away over your lifetime. The IRS tracks cumulative gifts and only taxes the amount that exceeds both an annual limit and a lifetime limit. These limits change yearly, and they vary by state.

Gift tax is separate from income tax. The person receiving the gift does not pay tax on it. You, the giver, are responsible for any tax owed, and you report it on Form 709 when you file your federal tax return.

Key Takeaways

  • The federal gift tax rate is a flat 40 percent, but it only applies to gifts above the annual exclusion amount and lifetime exemption threshold.
  • For 2024, you can give up to $18,000 per person per year without triggering any tax reporting or tax owed.
  • The lifetime exemption—the total amount you can give away tax-free over your entire life—is much higher and changes based on federal law, currently in the millions.
  • If you give more than the annual limit to one person, you must file Form 709 with the IRS, even if you owe no tax.
  • State gift tax rates and rules differ from federal rules, and some states have their own gift tax systems separate from the federal one.

Annual exclusion: the amount you can give each year without reporting

The annual exclusion is the amount of money or property value you can give to any one person in a single calendar year without filing a gift tax return or owing any federal tax. For 2024, this amount is $18,000 per recipient. This means you can give $18,000 to your child, $18,000 to your sibling, $18,000 to a friend, and so on, all in the same year, with no tax consequence.

The annual exclusion resets on January 1 each year. If you give someone $18,000 in December and another $18,000 in January of the following year, both gifts are within the exclusion for their respective years. The exclusion applies to gifts of cash, property, investments, or anything else of monetary value.

Married couples can combine their exclusions. If you are married, you and your spouse can each give $18,000 to the same person in the same year, for a total of $36,000, without any tax filing or tax owed. This is called gift splitting, and both spouses must agree to it on the tax return.

The annual exclusion amount is adjusted for inflation every year and is published by the IRS in October. If you give more than the annual exclusion to one person in a single year, you must file Form 709 to report the excess, even if you do not owe tax yet.

Lifetime exemption: the total amount you can give away tax-free

Beyond the annual exclusion sits the lifetime exemption, which is the total dollar amount you can give away over your entire life before owing any federal gift tax. For 2024, this exemption is $13.61 million per person. This is a much larger threshold than the annual exclusion, and it applies to the sum of all gifts you make over your lifetime that exceed the annual exclusion.

Here is how it works in practice: if you give someone $25,000 in a single year, you have exceeded the annual exclusion by $7,000. That $7,000 counts against your lifetime exemption. You must file Form 709 to report it, but you owe no tax because you still have $13.61 million of lifetime exemption remaining. Only when your cumulative excess gifts reach your lifetime exemption limit do you owe the 40 percent tax.

The lifetime exemption is not permanent. It is set by federal law and changes when Congress acts. The current high exemption amount is scheduled to drop significantly after 2025 unless Congress extends it. When that happens, the exemption will fall to roughly $7 million per person (adjusted for inflation). This means planning around the exemption amount matters if you are giving away large sums.

Married couples each have their own lifetime exemption. A husband and wife can each give away $13.61 million before owing tax, for a combined $27.22 million (in 2024). This is one reason married couples with substantial wealth often coordinate their giving strategy.

When you owe the 40 percent tax

You owe the 40 percent federal gift tax only when your cumulative lifetime gifts exceed both the annual exclusion in a given year and your remaining lifetime exemption. This is rare for most households because the lifetime exemption is so high.

Example: suppose you have already used $13 million of your lifetime exemption through prior gifts. In 2024, you give someone $1 million. The first $18,000 is covered by the annual exclusion. The remaining $982,000 counts against your lifetime exemption. You have only $610,000 of exemption left, so $372,000 is over the limit. You owe 40 percent of $372,000, which is $148,800. You report this on Form 709 and pay the tax when you file your return.

The tax is your responsibility, not the recipient's. You must pay it from your own funds. If you do not pay, the IRS will pursue collection against you, not the person who received the gift.

State gift tax: rules that differ from federal law

Most states do not have a gift tax. However, a small number of states—currently Connecticut, Delaware, Illinois, Louisiana, Mississippi, North Carolina, and Tennessee—have their own gift tax systems. These state taxes operate separately from the federal gift tax and have their own rates, exclusions, and exemptions.

State gift tax rates and thresholds vary widely. Some states tax gifts at rates lower than 40 percent; others have different annual exclusion amounts or lifetime exemptions. If you live in or give to someone in a state with a gift tax, you may owe tax to that state even if you owe nothing to the federal government.

You must research the rules in your state and any state where the recipient lives. A gift that is tax-free under federal law may still trigger a state tax bill. State tax forms and filing requirements are separate from federal Form 709.

Gifts that are never taxed, regardless of amount

Certain types of gifts are exempt from gift tax entirely, no matter how large they are. These are called unlimited exclusions, and they do not count against your annual exclusion or lifetime exemption.

Gifts to your spouse (if your spouse is a U.S. citizen) are never subject to gift tax, no matter the amount. You can give your spouse $1 million, $10 million, or more with no tax consequence. Gifts to a charity that is recognized by the IRS are also unlimited and tax-free. Payments made directly to a medical provider or educational institution on behalf of someone else are not considered taxable gifts, even if they are large.

These unlimited exclusions are the reason wealthy individuals often use spousal gifts and charitable giving as part of their overall financial strategy. However, the rules around what qualifies as a direct payment to a provider or school are strict, and improper structure can result in the gift being taxed.

How to report gifts on your tax return

If you give more than the annual exclusion to any one person in a calendar year, you must file Form 709 (United States Gift and Generation-Skipping Transfer Tax Return) with the IRS. This form is filed with your federal income tax return or separately if you do not file an income tax return that year.

Form 709 requires you to list each gift that exceeded the annual exclusion, the recipient's name and address, the date of the gift, and the fair market value of what was given. You also report how much of your lifetime exemption you are using. The form is due by April 15 of the year following the gift, the same deadline 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, if applicable, using a portion of your lifetime exemption. Many people file this form every year without owing any tax because their cumulative gifts remain below their lifetime exemption.

Frequently Asked Questions

Do I have to pay gift tax on money my parents give me?

No. The person giving the gift is responsible for any gift tax, not the recipient. Your parents can give you money without you owing anything. However, your parents may need to file Form 709 if the gift exceeds their annual exclusion, depending on how much they have already given away in their lifetime.

What is the difference between gift tax and income tax?

Gift tax and income tax are separate. Income tax applies to money you earn or receive as payment. Gift tax applies to transfers of money or property where you receive nothing in return. A gift is not income to the recipient, so you do not report it as income on your tax return. The giver may owe gift tax, but the recipient owes nothing.

Can I give away my annual exclusion amount to multiple people?

Yes. The annual exclusion applies per recipient, not per year total. You can give $18,000 to one person, $18,000 to another, $18,000 to a third, and so on, all in the same calendar year, with no tax consequence. The limit is $18,000 per person per year, not $18,000 total.

What happens if I give someone more than the annual exclusion and then die?

Gifts you made during your lifetime that exceeded the annual exclusion but were covered by your lifetime exemption do not change the tax owed on your estate. However, using your lifetime exemption for gifts reduces the exemption available to shelter your estate from estate tax after you die. This is why the lifetime exemption for gifts and the lifetime exemption for estates are linked under current federal law.

Do I need to report gifts if they are under the annual exclusion?

No. Gifts under the annual exclusion amount require no filing and no tax reporting. You can give someone $18,000 or less in a year with no Form 709 and no tax consequence. Only gifts above the annual exclusion require you to file.