The federal gift tax rate and when it applies

The federal gift tax itself is 40 percent, but most people never pay it. That is because the IRS lets you give away a large amount of money during your lifetime without owing any tax at all. For 2024, you can give up to $18,000 per person per year without filing any paperwork or reducing your lifetime limit. If you give more than $18,000 to one person in a single year, you must file Form 709 (Gift Tax Return) with the IRS, even if you do not owe tax.

The $18,000 annual amount changes each year based on inflation. In 2023 it was $17,000. The IRS announces the new limit in October or November for the following year. This yearly limit is called the annual exclusion, and it resets on January 1 each year.

Married couples can combine their annual exclusions. If you are married and file jointly, you and your spouse together can give $36,000 per person per year (in 2024) without filing Form 709. Your spouse must consent to this arrangement, and you must both report it correctly if you give more than the individual limit.

Key Takeaways

  • You can give $18,000 per person per year (2024) without filing a gift tax return or owing any tax.
  • Gifts above the annual limit require you to file Form 709, but you still may owe no tax if you have not used your lifetime exemption.
  • Your lifetime exemption is $13.61 million (2024), which means you can give away that total amount over your entire life before the 40 percent tax applies.
  • Married couples can give twice the annual limit if both spouses consent and report the gift correctly.
  • Certain gifts do not count toward any limit: tuition paid directly to a school, medical expenses paid directly to a provider, and gifts to your spouse.

Your lifetime exemption and how it works

Even if you give more than $18,000 to one person in a year, you probably will not owe tax. The IRS gives every person a lifetime exemption — a total amount you can give away over your entire life before the 40 percent tax kicks in. For 2024, that exemption is $13.61 million. In 2023 it was $12.92 million.

Here is how it works in practice: if you give your daughter $50,000 in 2024, you file Form 709 to report the gift. You do not owe tax on it. Instead, the $32,000 over the annual limit ($50,000 minus $18,000) is subtracted from your $13.61 million lifetime exemption. You now have $13.578 million left to give away tax-free during the rest of your life.

The lifetime exemption is scheduled to drop significantly after 2025. Starting January 1, 2026, the exemption will fall to approximately $7 million per person (adjusted for inflation), unless Congress changes the law. This is one reason some people plan large gifts before the end of 2025.

Gifts that do not count toward any limit

Certain gifts are completely exempt from gift tax rules and do not use up your annual exclusion or lifetime exemption. The most common are tuition and medical expenses. If you pay a school or university directly for someone's tuition, that payment does not count as a gift, no matter how much it is. The same rule applies to medical expenses: if you pay a doctor, hospital, or other medical provider directly for someone else's care, that payment is not a gift.

Gifts to your spouse are also unlimited. You can give your spouse any amount of money or property without filing a return or using any of your exemption, as long as your spouse is a U.S. citizen. If your spouse is not a U.S. citizen, the annual limit is higher ($18,000 in 2024) but still applies.

Gifts to charities registered with the IRS as 501(c)(3) organizations do not count as taxable gifts. Neither do gifts to political organizations or candidates. These gifts may be tax-deductible on your income tax return, but they do not trigger gift tax rules.

What triggers the requirement 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 calendar year. For 2024, that means filing if you give more than $18,000 to a single individual. You file Form 709 with your federal income tax return (Form 1040) on April 15 of the following year, or by the extended important date if you file for an extension.

There are exceptions to this filing requirement. You do not file Form 709 if the gift is to your spouse (and your spouse is a U.S. citizen), if it is tuition or medical expenses paid directly to the provider, or if it is to a charity. You also do not file if you and your spouse are splitting a gift and you both report it correctly on separate returns.

Filing Form 709 does not mean you owe tax. It straightforward reports the gift to the IRS and documents how much of your lifetime exemption you have used. Many people file this form every year and never owe a single dollar in gift tax.

State gift taxes and other rules

Most states do not have a gift tax. However, a few states — including Connecticut, Delaware, Illinois, Louisiana, Mississippi, North Carolina, and Tennessee — have or had gift taxes at some point. State rules vary widely, and some states have phased out their gift taxes or combined them with estate taxes. If you live in or give money to someone in one of these states, check your state tax agency website for current rules.

The federal gift tax and state gift taxes are separate. You may owe federal tax, state tax, both, or neither depending on where you live and the size of your gift. Some states use the same annual exclusion as the federal government; others use different amounts.

How gifts affect your estate tax

Gifts you make during your lifetime reduce the amount you can pass to heirs tax-free when you die. The lifetime exemption for gift tax and the exemption for estate tax are linked. If you use $100,000 of your lifetime exemption by making large gifts now, you will have $100,000 less available to shield your estate from tax after you die.

This connection is important if your estate is large. If you own a house, investments, retirement accounts, and other property worth several million dollars, making large gifts during your lifetime can reduce what your heirs owe in estate tax later. However, this strategy only makes sense if your total estate is close to or above the exemption limit. For most people, the exemption is so large that they will never owe estate tax or gift tax.

Common mistakes when reporting gifts

The most common mistake is not filing Form 709 when required. If you give more than $18,000 to one person and do not file, the IRS may assess penalties and interest. Filing is straightforward and costs nothing, so it is worth doing correctly even if you do not owe tax.

Another mistake is misunderstanding what counts as a gift. Loans do not count as gifts if you document them in writing and charge interest at the IRS minimum rate (which changes quarterly). Payments for someone's living expenses or rent may or may not count as gifts depending on your relationship and intent. If you are unsure, file Form 709 to be safe.

A third mistake is forgetting that the annual exclusion applies per recipient, not per year total. You can give $18,000 to your daughter, $18,000 to your son, and $18,000 to your grandchild all in the same year without filing, because each gift is under the limit. But if you give $25,000 to your daughter alone, you must file Form 709 for that gift.

Frequently Asked Questions

Do I owe gift tax if I give my child money for a down payment on a house?

Only if the gift exceeds $18,000 per year (2024) and you have already used your lifetime exemption. Most people have not used their exemption, so you would not owe tax. You would file Form 709 to report it, but no tax would be due. If you give less than $18,000, you do not file at all.

What if I give someone money and they give it back — is that still a gift?

If the money is truly returned, it was never a gift and does not count. However, if there is any expectation that the person will repay you, you should document it as a loan in writing with an interest rate and repayment schedule. Without documentation, the IRS may treat it as a gift.

Can I give my grandchild money for college without filing a gift tax return?

If you pay the college or university directly for tuition, you can pay any amount without filing or owing tax. If you give money to your grandchild and they pay the tuition themselves, gifts over $18,000 per year require you to file Form 709. Paying the school directly is the cleaner approach.

Does my gift count if I give it in December but the recipient does not receive it until January?

The gift is counted in the year the recipient receives it, not the year you send it. If you mail a check in December but your recipient does not cash it until January, the gift counts toward the next year's annual exclusion.

What happens if I give away more than my lifetime exemption?

You owe a 40 percent tax on the amount over your exemption. For example, if you have used your entire $13.61 million exemption and give someone $100,000, you owe $40,000 in gift tax. You pay this tax when you file Form 709. This situation is rare and typically only occurs for very wealthy individuals.