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

The federal gift tax rate is a flat 40% on gifts that exceed your annual exclusion and lifetime exemption. However, the structure matters more than the rate itself. You do not owe tax on most gifts you give during your lifetime because the IRS lets you give away a certain amount each year and over your entire life before the 40% rate applies.

For 2024, you can give up to $18,000 per person per year without filing any paperwork or using your lifetime exemption. Married couples can give $36,000 per person per year by combining their exclusions. Gifts below these amounts simply do not trigger tax, regardless of how many people you give to.

The lifetime exemption — the total amount you can give away over your entire life before owing the 40% tax — is $13.61 million per person in 2024. When you exceed both your annual exclusion and your lifetime exemption, the IRS taxes the overage at 40%. Most people never reach this threshold.

Key Takeaways

  • The federal gift tax rate is 40%, but it only applies to gifts above your annual exclusion ($18,000 per person in 2024) and your lifetime exemption ($13.61 million in 2024).
  • Gifts under the annual exclusion do not require you to file a tax return or report them to the IRS.
  • The lifetime exemption amount changes each year based on inflation and is set to drop significantly in 2026 unless Congress acts.
  • State gift taxes exist in only a few 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 they can give tax-free.

How the annual exclusion works in practice

The annual exclusion is the simplest part of gift tax. In 2024, you can give $18,000 to any one person without triggering tax or paperwork. You can give this amount to as many people as you want in the same year. If you give $18,000 to your child, $18,000 to your grandchild, $18,000 to your sibling, and $18,000 to a friend, none of those gifts are taxable.

The exclusion resets on January 1 each year. If you give someone $18,000 in December and another $18,000 in January of the next year, both gifts are within the exclusion for their respective years. The annual exclusion amount increases every few years when inflation reaches certain thresholds — it was $17,000 in 2023 and will likely be $19,000 in 2025.

Gifts that exceed the annual exclusion do not automatically trigger tax. Instead, they count against your lifetime exemption. If you give someone $25,000 in a single year, the first $18,000 is covered by the annual exclusion, and the remaining $7,000 reduces your lifetime exemption from $13.61 million to $13.603 million. You file Form 709 (Gift Tax Return) to report the overage, but you owe no tax at that time.

Understanding the lifetime exemption and when the 40% rate kicks in

Your lifetime exemption is the total amount you can give away — beyond the annual exclusion — before owing the 40% tax. This exemption is per person, not per gift. In 2024, each individual has a $13.61 million lifetime exemption. Once you have given away more than $13.61 million over your lifetime (beyond annual exclusions), every additional dollar you give is taxed at 40%.

The lifetime exemption is also called the "unified credit" because it applies to both gifts during your lifetime and to your estate after you die. If you give away $5 million during your lifetime, your estate exemption shrinks to $8.61 million. The IRS tracks cumulative gifts on Form 709, which you file whenever you give more than the annual exclusion in a single year.

The lifetime exemption is scheduled to drop to approximately $7 million per person on January 1, 2026, unless Congress extends the current law. This is a significant change that affects people planning large gifts or transfers. The annual exclusion will remain in place regardless of what happens to the lifetime exemption.

State gift tax rates and rules

Only a handful of states impose their own gift tax: Connecticut, Delaware, Illinois, Louisiana, Mississippi, New York, North Carolina, and Tennessee. Each state sets its own rate, exemption, and rules. State gift tax operates independently from federal gift tax — you can owe state tax on a gift that is not subject to federal tax, or vice versa.

Connecticut and Delaware, for example, tax gifts at rates ranging from 3.5% to 16%, depending on the size of the gift and your relationship to the recipient. Illinois taxes gifts at 0.5% to 16%. New York has no separate gift tax but does tax certain transfers at the estate tax rate. If you live in or give to someone in a state with gift tax, you need to understand that state's rules separately from the federal rules.

Most states have no gift tax at all. If you live in a state without gift tax and give to someone in another state, you typically owe no state tax. The rules vary enough that you should check your state's Department of Revenue website or speak with a tax professional if you are making large gifts and live in or give to someone in one of these eight states.

How married couples double their exclusions and exemptions

Married couples filing jointly can combine their annual exclusions and lifetime exemptions. This means a married couple can give $36,000 per person per year (instead of $18,000) without using any lifetime exemption. Over a lifetime, a married couple has $27.22 million in combined lifetime exemption in 2024 (instead of $13.61 million per person).

To use both spouses' exclusions, you must file Form 709 even if neither spouse individually exceeds the annual exclusion. This is called "gift splitting." For example, if one spouse gives $25,000 to a child, you can elect to treat it as if each spouse gave $12,500, keeping both gifts within the annual exclusion. Without gift splitting, the $25,000 gift would use $7,000 of the giving spouse's lifetime exemption.

Gift splitting requires both spouses to consent and is elected on Form 709. Once you elect to split gifts for a given year, all gifts that year are split between the spouses. This strategy is most useful for couples with unequal assets or when one spouse has already used part of their lifetime exemption.

What triggers the need to file Form 709

You must file Form 709 (Gift Tax Return) if you give more than the annual exclusion to any one person in a single year, even if you owe no tax. The form tells the IRS that you are using part of your lifetime exemption. You file it with your income tax return by April 15 of the following year (or by October 15 if you file an extension).

You do not file Form 709 for gifts within the annual exclusion. If you give $18,000 or less to each person you give to, no filing is required. You also do not file for gifts to your spouse (if your spouse is a U.S. citizen) or for direct payments to medical providers or educational institutions on behalf of someone else — these are not considered taxable gifts at all.

Filing Form 709 does not mean you owe tax. It simply documents that you have used part of your lifetime exemption. The IRS uses these forms to track cumulative lifetime gifts. If you never exceed your lifetime exemption, you will never owe the 40% tax, but you still need to file the form to report gifts over the annual exclusion.

How the 40% rate applies to large gifts and estates

The 40% rate applies only to the amount of gifts that exceed both your annual exclusion and your lifetime exemption. If you have given away $13.61 million over your lifetime and then give another $100,000, the IRS taxes that $100,000 at 40%, meaning you owe $40,000 in tax. You pay this tax when you file your return; the IRS does not take it from the gift itself.

The same 40% rate applies to your estate after you die if your estate exceeds your remaining exemption. If you used $5 million of your lifetime exemption during your life, your estate exemption is reduced to $8.61 million. If your estate is worth $15 million, the amount over $8.61 million ($6.39 million) is taxed at 40% when your estate is settled.

The 40% rate has been in place since 2013 and applies to all gifts and estates that exceed the exemption threshold. This is why the lifetime exemption amount matters so much — it determines how much you can transfer before this high rate applies.

Frequently Asked Questions

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

No, not unless you give more than $18,000 per person per year (or $36,000 if you are married and your spouse agrees to split the gift). Gifts under the annual exclusion are never taxable, regardless of who receives them or how many gifts you make.

What is the difference between gift tax and income tax?

Gift tax and income tax are separate. The person who receives a gift does not owe income tax on it. The person who gives the gift may owe gift tax if the gift exceeds the annual exclusion and lifetime exemption. Income tax applies to money you earn, not to money you receive as a gift.

If I give away $13.61 million now, can I give away more later?

No. Your lifetime exemption is $13.61 million total for your entire life in 2024. Once you use it, you cannot use it again. Any gifts beyond that amount are taxed at 40%. The exemption does not reset each year — only the annual exclusion does.

Will the 40% rate change after 2025?

The lifetime exemption is scheduled to drop to about $7 million per person on January 1, 2026, unless Congress extends current law. The 40% rate itself is unlikely to change, but the amount you can give tax-free will shrink significantly. This is a major reason people are making large gifts now.

Do I owe gift tax if I pay someone's medical bills or tuition directly?

No. Payments made directly to a medical provider or educational institution on behalf of someone else are not considered taxable gifts, regardless of the amount. You can pay unlimited medical bills or tuition without triggering gift tax or filing Form 709, as long as you pay the provider directly, not the person.