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Gift Tax: How It Works, Who Pays 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 
Updated
Edited by Pamela de la Fuente Reviewed by Lei Han
gift tax

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Nerdy takeaways
  • A gift tax is a tax owed on the transfer of money or property to another person while receiving nothing or less than full value in return.

  • If you give more than the annual gift tax limit, you may have to file a gift tax return, but this does not necessarily mean that you'll owe taxes on the gift.

  • The 2024 annual gift tax exclusion is $18,000. In 2023, it was $17,000.

Sending a $20 bill with a graduation card? No need to sweat the federal gift tax. But if you're dispersing millions worth of gifts over the course of your lifetime, you may have to cut a few extra checks to the IRS.

Jump to:

What is the gift tax?

The gift tax is a federal tax on transfers of money or property to other people who are getting nothing or less than full value in return. Two factors determine how much you can give away before owing taxes on the gifted amount: the annual gift tax limit and the lifetime gift tax limit.

If you exceed the annual gift tax limit (also known as the annual gift tax exclusion), you must file a gift tax return with the IRS to report it. The amount of your contribution that exceeds the annual limit will then be subtracted from your larger lifetime gift tax exclusion. Once you exhaust your lifetime exclusion, you may begin to owe gift taxes.

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How the annual gift tax exclusion works

The annual gift tax exclusion is a set dollar amount that you may give someone without needing to report it to the IRS. The threshold is typically adjusted to account for inflation each year. The 2023 annual gift tax exclusion was $17,000, and the 2024 annual gift tax exclusion is $18,000.

If you give away more than the annual exclusion amount in cash or assets (for example, stocks, land, a new car) to any one person during the tax year, you will need to file a gift tax return in addition to your federal tax return the following year.

That doesn’t mean you have to pay a gift tax — it just means you need to submit IRS Form 709 to disclose the gift.

  • The annual exclusion is per recipient, not the sum total of all your gifts. That means, for example, that you can gift $18,000 to your cousin, another $18,000 to a friend, another $18,000 to a neighbor, and so on in 2024 without having to file a gift tax return in 2025.

  • If you’re married, you and your spouse could each give away $18,000 in 2024 without needing to file a gift tax return in 2025. If you want to combine your annual exclusions to give someone $36,000, you can choose to take advantage of "gift splitting"

    Internal Revenue Service. Instructions for Form 709 (2023). Accessed Feb 13, 2024.
    .

Gift tax limit 2023

The 2023 gift tax limit was $17,000. For married couples, the limit was $17,000 each, for a total of $34,000. This amount, formally called the annual gift tax exclusion, is the maximum amount you can give a single person without reporting it to the IRS.

If you gifted more than this sum in 2023, you must file a federal gift tax return, Form 709, in 2024

.

If you exceeded the annual exclusion in 2023 and have to notify the IRS, you still might not have to pay any taxes, unless you have also exceeded the additional lifetime gift tax exclusion.

Gift tax limit 2024

The 2024 gift tax limit is $18,000. For married couples, the limit is $18,000 each, for a total of $36,000. Giving one person more than this amount means you must file a federal gift tax return in 2025.

How the lifetime gift tax exclusion works

In addition to the annual gift tax exclusion, you get a lifetime gift tax exclusion. This means that any amount that you give over the annual limit is subtracted from your larger lifetime limit. Once you've gifted over your lifetime amount, you may begin to owe taxes.

“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.

The gift tax return that you need to file if you exceed the annual limit simply 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.

» MORE: Learn how estate tax works

2023 and 2024 lifetime gift tax exemption

The 2024 lifetime gift limit is $13.61 million. In 2023, the lifetime gift tax limit was $12.92 million. And because it’s per person, married couples can exclude double that in lifetime gifts.

  • For example, if you give your brother $50,000 in 2024, you’ll use up your $18,000 annual exclusion. The bad news is that you’ll need to file a gift tax return in 2025, but the good news is that you probably won’t pay a gift tax. Why? Because the extra $32,000 ($50,000 - $18,000) 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.

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

    Internal Revenue Service. Estate and Gift Tax FAQs. Accessed Feb 13, 2024.
    .

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Who pays the gift tax?

The donor, not the recipient, typically pays the gift tax. According to the IRS, money or property that is transferred to another person without receiving anything in exchange is a gift. Gifts that exceed a certain value may be subject to a tax.

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. However, if the assets later produce income (perhaps they earn interest or dividends, or you collect rent), that income is probably taxable

Internal Revenue Service. Publication 525: Taxable and Nontaxable Income. Accessed Feb 13, 2024.
. Also, keep in mind that while there is no federal inheritance tax, some states may impose their own.

Is the gift tax deductible?

Gifts of cash or property to family or friends are not tax deductible. Only charitable donations to qualified nonprofits may be tax-deductible

Internal Revenue Service. Frequently Asked Questions on Gift Taxes. Accessed Jan 17, 2024.
.

How much is the gift tax rate?

Taxpayers typically only pay gift tax on the amounts that exceed the allotted lifetime exclusion, $12.92 million in 2023 and $13.61 million in 2024. Gift tax rates range from 18% to 40%.

There are, of course, exceptions and special rules for calculating the tax, so check the instructions for IRS Form 709 for all the details

.

Taxable amount

Rate of tax

up to $10,000

18%

$10,001 to $20,000

20%

$20,001 to $40,000

22%

$40,001 to $60,000

24%

$60,001 to $80,000

26%

$80,001 to $100,000

28%

$100,001 to $150,000

30%

$150,001 to $250,000

32%

$250,001 to $500,000

34%

$500,001 to $750,000

37%

$750,001 to $1,000,000

39%

$1,000,000 and over

40%

How to avoid gift tax

What can trigger a gift tax return? Caring is sharing, but some situations inadvertently lead to a gift tax return, pros say.

Gifting large sums of money to family

Paying for vacations, cars or other stuff

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.

Joint bank accounts

“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.” This applies to joint accounts when the other owner is not your spouse.

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