Gift tax
Gift tax is a federal tax imposed on the transfer of property, such as cash, stocks, or real estate, given as a gift from one individual (the donor) to another. The donor is responsible for paying this tax only if the gift exceeds a specific annual exclusion amount, which, as of 2017, is set at $14,000 per recipient. A couple can collectively give $28,000 per recipient without incurring a gift tax. Unique exemptions exist for certain donations, including tuition and medical payments made directly to institutions, as well as gifts to spouses, political organizations, and qualified charities.
In addition, there is a lifetime exemption limit of $5.49 million, meaning most individuals will not encounter gift tax issues throughout their lives. However, if a donor gives gifts surpassing the annual exclusion, they must file a gift tax return, even if no tax is owed. Gift tax is closely related to estate tax, with both taxing the transfer of assets, either during a person's life or after death. Understanding the nuances of gift tax can help individuals navigate their financial planning and gifting strategies effectively.
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Gift tax
A gift tax is a type of federal tax paid on property (cash, stocks, real estate, etc.) given to another person as a gift. The person who gives the financial gift, also called the donor, is responsible for paying taxes on it only if it exceeds a specific amount set by the US government. Certain donations, such as tuition or medical payments, are not considered gifts and are exempt from gift tax. Gift taxes and estate taxes are closely related.
Overview
By law, a person is allowed to give an individual a gift of up to $19,000 per year ($18,000 through 2024) without paying gift tax. This is the amount an individual can give per person annually. This means a donor can contribute up to $19,000 per year to as many individuals as they wish without paying gift tax. In addition, couples can give a financial gift of up to $38,000 ($19,000 per donor) per recipient each year without paying gift tax.
The federal tax rate on gifts is between 18 and 40 percent. Gift recipients are not responsible for paying gift tax. In fact, most people do not end up paying gift tax ever because the lifetime limit is so high. In 2017, the lifetime federal gift tax limit in the United States was $5.49 million. This rose significantly, reaching $13.61 million in 2024 and $13.99 million in 2025. A donor does not have to pay gift tax until their gifts exceed this amount. In addition, any amount under the $19,000 annual per person limit does not count toward the lifetime limit.
For example, an individual gives his two children $25,000 each and his nephew $10,000. The two $25,000 donations are taxable because they exceed the $19,000 annual exclusion. However, the donor would only pay gift tax on these if they had exhausted the lifetime exemption amount of $13.99 million. The two taxable gifts would reduce the donor's lifetime exemption by $12,000 ($25,000 – $19,000 = $6,000 x 2 = $12,000). The $10,000 gift would not be subject to taxes or count toward the lifetime limit because it is below the $19,000 annual exclusion.
A gift is considered a piece of property (i.e., cash, stocks, real estate) that is transferred to another person for nothing or less than "fair market value" in return. Fair market value is the amount for which an asset such as a house would sell. For example, a check for $5,000 given to another individual would be considered a gift. If a person sells their house to a family member for $25,000, but the house is worth $100,000 on the market, they would be giving a gift of $75,000 (fair market value – price sold for = gift amount, so $100,000 – $25,000 = $75,000). No gift tax would need to be paid in the first example because $5,000 is under the annual exemption. In the second example, the donor would be responsible for paying taxes on $56,000 ($75,000 – $19,000 = $56,000) only if they have exceeded the lifetime limit. Also, the $56,000 would reduce the lifetime limit.
Not every sum of money given is considered a gift and subject to tax. The following are exempt from the federal gift tax:
- Gifts less than the annual exclusion amount of $19,000
- Gifts to a person's spouse (only if the spouse is a US citizen)
- Donations to political organizations
- Donations to charities approved by the Internal Revenue Service (IRS)
- School tuition and education payments for another person (as long as it is paid directly to an educational institution; this excludes all other school-related expenses such as books and other supplies)
- Medical expenses for another person (only if it is paid directly to the healthcare facility)
Even though an individual may not have to pay gift tax (because they have not satisfied the lifetime limit), they are required to file a tax return if they gave gifts of more than $14,000 that year. The individual must fill out Form 709: US Gift (and Generation-Skipping Transfer) Tax Return by the tax deadline of the year after the gift was made. Married couples in which both spouses have given gifts of more than $14,000, must file separate individual gift tax returns. Connecticut is the only state that requires individuals to pay state gift taxes of 12 percent, with a lifetime exemption amount of $13,610,000 (this lifetime exemption amount also includes estate tax limits).
Estate Taxes
Federal gift tax and estate tax are connected. Individuals must pay taxes on assets given away while they are alive in the form of a gift tax or after they have passed away in the form of an estate tax. An estate tax is a required tax on the transfer of assets after a person's death. An estate includes real estate, such as homes and land; finances, including cash, stocks, and bonds; business interests and jointly owned assets; and other assets, such as insurance proceeds. To determine the total worth of all assets, also called the gross estate, the fair market value is used, not the actual price paid for the items. Certain deductions exist on estates, such as transfers to a surviving spouse, charitable bequests, funeral expenses, debts, and legal fees. These are deducted from the gross estate to determine the taxable estate.
The lifetime federal gift tax of $13.99 million includes a person's estate. While gifts a person makes during their lifetime can reduce the taxable estate, gifts that exceed the annual exclusion of $19,000 will reduce the lifetime exclusion. For example, when using the earlier example, two $25,000 taxable gifts would reduce the lifetime exemption by $12,000. If a person's taxable estate is worth more than their lifetime exclusion, then taxes will have to be paid on the estate within nine months of the individual's death. Several states require an additional state estate tax. While the United States does not have a federal inheritance tax, several states have imposed their own taxes on money received from the estate of a deceased individual. In this case, however, the individual receiving the inheritance is required to pay taxes on it.
Bibliography
Ebeling, Ashlea. "IRS Announces 2017 Estate and Gift Tax Limits: The $11 Million Tax Break." Forbes, 8 Jan. 2021, www.forbes.com/sites/ashleaebeling/2016/10/25/irs-announces-2017-estate-and-gift-tax-limits-the-11-million-tax-break. Accessed 1 Jan. 2025.
"Estate and Gift Taxes." Internal Revenue Service, 26 Aug. 2024, www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes. Accessed 1 Jan. 2025.
"The Gift Tax Made Simple." Intuit, 16 Oct. 2024, turbotax.intuit.com/tax-tips/estates/the-gift-tax-made-simple/L5tGWVC8N. Accessed 1 Jan. 2025.
Herigstad, Sally. "Gift Tax: Do I Have to Pay Gift Tax When Someone Gives Me Money?" TaxAct, 17 Dec. 2024, blog.taxact.com/gift-tax-do-i-have-to-pay-gift-tax-when-someone-gives-me-money. Accessed 1 Jan. 2025.
"How Do the Estate, Gift, and Generation-Skipping Transfer Taxes Work?" Tax Policy Center, Jan. 2024, www.taxpolicycenter.org/briefing-book/how-do-estate-gift-and-generation-skipping-transfer-taxes-work. Accessed 1 Jan. 2025.
Randolph, Mary. "Very Few People Ever Need to Pay Federal Gift Tax." NOLO, 31 Dec. 2023, www.nolo.com/legal-encyclopedia/the-federal-gift-tax.html. Accessed 1 Jan. 2025.
"What Are Inheritance Taxes?" Intuit, 16 Oct. 2024, turbotax.intuit.com/tax-tips/estates/what-are-inheritance-taxes/L93IUc3sC. Accessed 1 Jan. 2025.