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 that exceed your annual exclusion and lifetime exemption. However, the structure means you only owe tax on the amount over those thresholds, not on the entire gift. For 2024, you can give up to $18,000 per person per year without reporting anything to the IRS. Gifts beyond that count against your lifetime exemption of $13.61 million (this figure changes yearly based on inflation).

Because the lifetime exemption is so high, the vast majority of people never file a gift tax return, let alone pay the tax. You would need to give away millions of dollars over your lifetime to owe anything. The 40 percent rate only applies to the portion of your gifts that exceeds both your annual exclusion and your lifetime exemption combined.

Key Takeaways

  • The gift tax rate is a flat 40 percent, but it only applies to gifts above your annual exclusion ($18,000 per person in 2024) and lifetime exemption ($13.61 million in 2024).
  • The annual exclusion resets every January 1, so you can give $18,000 to as many people as you want each year without triggering any tax or filing requirement.
  • Your lifetime exemption is shared with your estate tax exemption, meaning large gifts now reduce what you can pass tax-free when you die.
  • State gift taxes exist in some states and operate separately from federal tax, with their own rates and exemptions.
  • Married couples can combine their exclusions and exemptions, effectively doubling the amounts before any tax applies.

How the annual exclusion works

The annual exclusion is the simplest part of gift tax: you can give $18,000 per recipient per calendar year with no tax consequence and no filing requirement. This amount resets on January 1 each year. If you give someone $18,000 in December and another $18,000 in January, that is two separate annual exclusions and you owe nothing.

The exclusion applies per recipient, not per giver. If you have three children, you can give $18,000 to each one in the same year—$54,000 total—and none of it counts toward your lifetime exemption. Married couples can each use their own annual exclusion, so a married couple can give $36,000 per recipient per year.

Gifts that fall within the annual exclusion do not require you to file Form 709 (the gift tax return) with the IRS. You simply make the gift and keep no special records. This is why the annual exclusion is the most practical tool for transferring money during your lifetime.

What happens when you exceed the annual exclusion

If you give someone more than $18,000 in a single year, the excess counts against your lifetime exemption. You must file Form 709 with the IRS to report the overage, but you still do not owe any tax at that moment. The IRS simply records that you have used part of your $13.61 million lifetime exemption.

For example, if you give your daughter $25,000 in 2024, the first $18,000 is covered by your annual exclusion. The remaining $7,000 counts against your lifetime exemption. You file Form 709 to report this, but you pay no tax. That $7,000 simply reduces the amount you can pass tax-free to your heirs when you die.

The lifetime exemption is shared between gifts you make now and your estate when you die. If you use $500,000 of your exemption through large gifts during your lifetime, your estate will have $13.11 million left to pass tax-free. Once you exhaust the entire exemption through gifts and estate combined, the 40 percent tax applies to anything beyond that.

When you actually owe the 40 percent tax

You owe gift tax only when your total gifts (minus annual exclusions) exceed your lifetime exemption of $13.61 million. At that point, the 40 percent rate applies to the excess. Because this threshold is so high, it affects only the wealthiest families.

If you have given away $13.61 million over your lifetime and give another $100,000 gift, you owe 40 percent tax on that $100,000—which is $40,000. You pay this tax when you file your tax return for that year. The person receiving the gift does not pay anything; the tax falls on the giver.

The 40 percent rate is the same whether you are giving to family members, friends, or anyone else. There is no lower rate for gifts to children or spouses (though spouses have their own exemption rules). The rate applies uniformly to all taxable gifts.

How state gift taxes differ from federal tax

Most states do not have a gift tax, but a few do: Connecticut, Delaware, Illinois, Louisiana, Mississippi, New York, North Carolina, and Tennessee. Each state that has a gift tax sets its own rate and exemption amount, separate from the federal system.

Connecticut, for instance, has a gift tax with rates ranging from 3.6 to 6.6 percent and an annual exclusion of $15,000 per recipient. Delaware's rate is 12.8 percent with a $12,000 annual exclusion. If you live in or give to someone in a state with a gift tax, you may owe state tax even if you do not owe federal tax.

State and federal gift taxes are independent. You can owe federal tax, state tax, both, or neither depending on where you live, where the recipient lives, and the size of your gift. Check your state's tax authority website to learn whether your state has a gift tax and what its rules are.

How married couples can double their exemptions

Married couples can combine their annual exclusions and lifetime exemptions through a process called gift splitting. This means a married couple can give $36,000 per recipient per year ($18,000 each) without any tax or filing requirement. Over a lifetime, they can give $27.22 million combined before owing any tax.

To use gift splitting, both spouses must agree to it, and you must file Form 709 to elect it—even if the gift is within the annual exclusion. This is one of the few situations where you file a gift tax return even though you owe no tax. The election applies to all gifts made that year by both spouses.

Gift splitting is particularly useful for couples who want to transfer wealth to children or grandchildren during their lifetime. It effectively doubles the amount you can move without tax consequences, which can be significant over many years.

Frequently Asked Questions

Do I have to pay gift tax on gifts from my parents or grandparents?

No. The person giving the gift pays any gift tax owed, not the person receiving it. Gifts are not taxable income to the recipient under federal law, regardless of the amount. Your parents or grandparents would be responsible for any filing or tax, not you.

What counts as a gift for tax purposes?

A gift is any transfer of money or property where you receive nothing of equal value in return. Loans, even interest-free ones, are not gifts if you intend to repay them. Payments for tuition or medical expenses paid directly to the provider are also not gifts. Payments to a spouse or charity have their own rules and typically are not subject to gift tax.

Can I give more than $18,000 if I split it between two people?

No. The annual exclusion is per recipient, not per giver. You can give $18,000 to Person A and $18,000 to Person B in the same year, but you cannot give $36,000 to one person and claim it is split between two exclusions. Each person you give to gets their own $18,000 limit.

What happens if I give away $13.61 million and then die?

Your estate will owe estate tax on whatever you leave behind, because you have already used your entire exemption through gifts. The 40 percent estate tax rate applies to the value of your estate above zero (since your exemption is exhausted). This is why large lifetime gifts can have consequences for your heirs.

Does the annual exclusion amount change every year?

Yes. The IRS adjusts the annual exclusion for inflation in $1,000 increments. It was $17,000 in 2023 and $18,000 in 2024. The lifetime exemption also changes yearly. Check the IRS website or a tax professional before making large gifts to confirm the current year's amounts.