Gift tax (U.S.)

3 key takeaways:

• Annual exclusion: Each individual can gift up to a certain amount per year without incurring gift tax.
• Lifetime exemption: There is a lifetime exemption amount that can be gifted tax-free over a person’s lifetime.
• Responsibility: The donor, not the recipient, is typically responsible for paying the gift tax.

What is the gift tax in the U.S.?

The U.S. gift tax is a federal tax imposed on the transfer of property or money from one person to another when the donor does not receive something of equivalent value in return. The gift tax is designed to prevent individuals from avoiding estate taxes by giving away their assets before they die. However, there are exclusions and exemptions that allow for significant amounts of gifting without tax consequences.

How does the gift tax work?

1. Annual exclusion: As of 2024, each individual can gift up to $17,000 per recipient per year without incurring gift tax. This means a person can give $17,000 to as many people as they wish each year without having to file a gift tax return or pay gift tax.
2. Lifetime exemption: In addition to the annual exclusion, there is a lifetime exemption amount. As of 2024, this exemption is $12.92 million per individual. This means that over the course of their lifetime, an individual can gift up to $12.92 million without incurring gift tax, after accounting for annual exclusions. Gifts exceeding the annual exclusion count against this lifetime exemption.
3. Tax rates: If the lifetime exemption is exceeded, the excess amount is subject to gift tax, which can range from 18% to 40%, depending on the size of the taxable gift.

Filing requirements

• Gift tax return: If an individual makes a gift exceeding the annual exclusion amount, they are required to file IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return, to report the gift. This form also tracks the use of the lifetime exemption.
• Spousal gifts: Gifts between spouses are generally not subject to gift tax, as there is an unlimited marital deduction for transfers between U.S. citizen spouses.

Exceptions and exclusions

• Educational and medical expenses: Payments made directly to educational institutions for tuition or to medical providers for medical expenses on behalf of someone else are not considered taxable gifts and do not count against the annual exclusion or lifetime exemption.
• Charitable contributions: Gifts made to qualified charities are also exempt from gift tax.

Planning considerations

• Gifting strategy: To maximize tax-free transfers, individuals can employ strategies such as making annual exclusion gifts, paying for tuition or medical expenses directly, and using their lifetime exemption strategically.
• Trusts and other vehicles: Trusts and other estate planning tools can be used to manage and reduce gift tax liability, often in conjunction with the lifetime exemption and annual exclusions.

Related topics

• Estate tax: Understanding the federal estate tax, which is related to the gift tax and applies to the transfer of assets at death.
• Generation-skipping transfer tax (GSTT): A tax on transfers to grandchildren or more remote descendants, which can also affect gifting strategies.
• Tax planning: Strategies for minimizing tax liabilities, including gift tax, estate tax, and income tax.
• Wealth transfer: Methods and considerations for transferring wealth to future generations, including the use of trusts and gifting.
• Charitable giving: Exploring the tax benefits and strategies associated with making charitable donations.

By exploring these related topics, you can gain a comprehensive understanding of the U.S. gift tax, how it fits into broader tax and estate planning, and strategies for minimizing tax liabilities while effectively transferring wealth.