Gift Tax: What It Is and How It Works

What Is the Gift Tax?

The gift tax is a federal tax imposed by the Internal Revenue Service (IRS) on taxpayers who transfer money or property to someone else without receiving anything of substantial value. A gift can include cash, real estate, and other forms of property.

For tax year 2025, any gifts that exceed the lifetime gift tax exclusion limit of $13.99 million are subject to the gift tax, and any gifts over $19,000 must be reported to the IRS via Form 709.

Defining a Gift

A gift is anything of value that is transferred from one individual or entity to another, without anything expected in return. The following table shows what constitutes a gift.

IRS Limits

There are two limits set by the IRS: the amount that you can give per year without reporting it to the IRS ($19,000 in tax year 2025), and the amount you can give over your lifetime without paying the gift tax ($13.99 million in tax year 2025). In tax year 2024, those numbers were $18,000 and $13.61 million, respectively.

The annual exclusion limit applies per recipient. So someone with three children could gift as much as $19,000 per child for a total of $57,000, without needing to report it to the IRS. If they gave each of their children more than that, however, they would need to report each gift to the IRS with Form 709: United States Gift (and Generation-Skipping Transfer) Tax Return. This form must be attached to an annual tax return by the tax filing deadline of the year after the gift was made, which is typically April 15.

Gift tax rates are based on the size of the taxable gift and can range between 18% and 40%. In cases where the value is not immediately evident, such as art or stocks, taxpayers use the fair market value (FMV) of the asset to assess their tax liability.

Gift Tax Strategies

• Gift Splitting: A married couple, filing jointly can give a single recipient up to $38,000 in tax year 2025 without needing to report it to the IRS. This strategy, known as gift splitting, effectively doubles the allowable tax-free gift to an individual. (This gift can be in addition to tuition paid directly to a grandchild’s college, which is exempted from the gift tax.)
• Gift in Trust: The gift tax exclusion usually doesn’t apply to money distributed by gift-in-trust conveyances. Donors can give gifts over the annual exclusion amount without paying taxes by establishing a special trust to receive and distribute the funds. The Crummey trust allows the beneficiary to withdraw assets within a limited period, such as 90 days or six months. This gives the beneficiary a present interest in the trust, and this sort of distribution can qualify as a nontaxable gift. The recipient can only take out a sum equal to the gift given to the trust.

Examples

• Susan gave $100,000 in gifts split between five individuals in 2024, or $20,000 each. Because the annual exclusion limit for that year is $18,000 per person, $2,000 of each individual's gift, or $10,000 of the total amount given, is not excluded and reduces the lifetime exemption by that amount.
• In 2024, a grandfather paid $20,000 for his grandchild's tuition. That same year, he also gave the student $18,000 for rent. Neither payment is reportable for gift tax purposes: the tuition is excluded outright, and the $18,000 is the maximum allowed under the annual exclusion.

The Bottom Line

The gift tax is a federal levy that applies when the lifetime gift tax exclusion amount has been exceeded. For tax year 2025, that limit is $13.99 million. (In tax year 2024, it was $13.61 million.) There is also an annual limit that determines whether a gift is reportable to the IRS (and thus counts against the lifetime gift tax exclusion limit). For tax year 2025, that limit is $19,000. (In tax year 2024, it was $18,000.) In addition, numerous types of gifts are exempted, including those given to a spouse.