Gift Tax: How It Works, Exemptions and Rates

Two things keep the IRS out of most people's hair: the annual gift tax exclusion and the lifetime exclusion.
Sabrina Parys
Tina Orem
By Tina Orem and  Sabrina Parys 
Reviewed by Lei Han
gift tax

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There are a lot of things to worry about in life, but the gift tax probably isn’t one of them.

What is the gift tax?

Gift tax is a federal tax on transfers of money or property to other people while getting nothing (or less than full value) in return. Few people owe gift tax; the IRS generally isn’t involved unless a gift exceeds $16,000 in 2022 and $17,000 in 2023. Even then, it might only trigger extra paperwork.

Do you pay taxes when you receive a gift?

In most cases, no. Assets you receive as a gift or inheritance typically aren’t taxable income at the federal level.

Internal Revenue Service. Publication 525: Taxable and Nontaxable Income.. Accessed Oct 21, 2022.
However, if the assets later produce income (perhaps they earn interest or dividends, or you collect rent), that income is likely taxable. IRS Publication 525 has the details. Also, some states have an inheritance tax.

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How do I avoid gift tax?

Two things keep the IRS’s hands out of most people's candy dish: the annual exclusion ($16,000 in 2022 and $17,000 in 2023), and the lifetime exclusion ($12.06 million in 2022 and $12.92 million in 2023).

Stay below those and you can be generous under the radar. Go above, and you'll have to fill out a gift tax form when filing returns — but you still might avoid having to pay any gift tax.

How the annual gift tax exclusion works

In 2022, you can give up to $16,000 to someone in a year and generally not have to deal with the IRS about it. In 2023, this threshold is $17,000. A bit more about how that works:

  • If, for example, you give more than $16,000 in cash or assets (for example, stocks, land, a new car) to any one person in 2022, you need to file a gift tax return. That doesn’t mean you have to pay a gift tax. It just means you need to file IRS Form 709 to disclose the gift.

  • The annual exclusion is per recipient; it isn’t the sum total of all your gifts. That means, for example, that you can give $16,000 to your cousin, another $16,000 to a friend, another $16,000 to a neighbor, and so on all in 2022 without having to file a gift tax return.

  • If you’re married, you and your spouse may give away up to $16,000 each without needing to file a gift tax return in 2022. If you want to combine your annual exclusions in order to together gift a donee up to $32,000, you can elect to take advantage of "gift splitting"

    Internal Revenue Service. . Accessed Aug 23, 2022.
    . The IRS has more details here.

  • Gifts between spouses are unlimited and generally don’t trigger a gift tax return. Though, if the spouse isn't a U.S. citizen, special rules may apply.

    Internal Revenue Service. Instructions for Form 709 : Gifts to Your Spouse. Accessed Oct 21, 2022.
    Gifts to nonprofits are charitable donations, not gifts.

  • The person receiving the gift usually doesn't need to report the gift.

How the lifetime gift tax exclusion works

On top of the $16,000 annual exclusion in 2022, you get a $12.09 million lifetime exclusion in 2022. This rises to $12.92 million in 2023. And because it’s per person, married couples can exclude double that in lifetime gifts. That comes in handy when you’re giving away more than $16,000.

“Think about buckets or cups,” says Christopher Picciurro, a certified public accountant and co-founder of accounting and advisory firm Integrated Financial Group in Michigan. Any excess “spills over” into the lifetime exclusion bucket.

For example, if you give your brother $50,000 this year, you’ll use up your $16,000 annual exclusion. The bad news is that you’ll need to file a gift tax return, but the good news is that you probably won’t pay a gift tax. Why? Because the extra $34,000 ($50,000 - $16,000) simply counts against your lifetime exclusion. Next year, if you give your brother another $50,000, the same thing happens: you use up your annual exclusion and whittle away another portion of your lifetime exclusion.

The gift tax return keeps track of that lifetime exclusion. So if you don't gift anything during your life, then you have your whole lifetime exclusion to use against your estate when you die. Learn more about how estate tax works.

Another trick that can help you avoid an unwanted surprise is simply keeping an eye on the calendar. In 2026, the lifetime exclusion amount will revert back to its pre-2018 level of around $5 million (as adjusted for inflation) per individual.

Internal Revenue Service. Estate and Gift Tax FAQs. Accessed Aug 23, 2022.
You can find more details here.

What is the gift tax rate?

If you’re lucky enough and generous enough to use up your exclusions, you may indeed have to pay the gift tax. The rates range from 18% to 40%, and the giver generally pays the tax. There are, of course, exceptions and special rules for calculating the tax, so see the instructions to IRS Form 709 for all the details.

What can trigger a gift tax return

Caring is sharing, but some situations often inadvertently trigger the need to file a gift tax return, pros say.

Spoiling the grandkids with college money

Springing for vacations, cars or other stuff

  • If you fork out $40,000 for Junior’s wedding, or just pay for the crazy-expensive honeymoon, get ready to do some paperwork.

  • If you’re paying tuition or medical bills, paying the school or hospital directly can help avoid the gift tax return requirement (see the instructions to IRS Form 709 for details).

Laid-back loans

Lending money to friends and family can be tricky, and the IRS can make it even worse. It considers interest-free loans as gifts. Or if you lend them money and later decide they don't need to repay you, that's also a gift.

Elbowing in on a non-spouse bank account

“Let’s say you live by Grandma, so for convenience, we're going to put you on Grandma's bank account. Guess what just happened?” Picciurro says. “If you're put as a joint [owner] on a bank account with somebody and you have the right to take the money out at any time, essentially Grandma is giving you a gift.”

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