Understanding the Gift Tax - What You Need to Know
Did you know that giving money or property to someone without receiving full value in return may be considered a taxable gift under federal law? While making a gift is often a generous and well-intentioned act, it can come with reporting obligations—and in some cases, tax consequences.
What Is Considered a Gift?
A gift for tax purposes occurs when you transfer money, property, or other assets without receiving something of equal value in return. In such cases, you—the donor—may be required to file a federal gift tax return, and for substantial gifts, you could face gift taxes of up to 40 percent.
Importantly, gift tax liability falls on the donor, not the recipient. The person receiving the gift does not report it as income and does not pay gift tax (except in rare arrangements where they agree to do so).
Most Gifts Are Not Taxed—Here’s Why
Although the federal gift tax exists to prevent unlimited tax-free transfers of wealth during a person’s lifetime, relatively few people pay it—thanks to several key exclusions and exemptions.
1. Annual Gift Tax Exclusion. Each year, you can give a certain amount to any number of individuals without incurring gift tax or triggering a reporting requirement. For 2025, this annual exclusion amount is $19,000 per recipient. So, for example, if you have three children, you can give each of them $19,000 in 2025—totaling $57,000—without needing to file a gift tax return.
2. Gift Splitting for Married Couples. If you’re married, you and your spouse can combine your exclusions—a strategy known as gift splitting. This allows you to give up to $38,000 per recipient in 2025 without triggering gift tax.
3. Lifetime Estate and Gift Tax Exemption. In addition to the annual exclusion, lawmakers allow a much larger lifetime exemption. Here are the 2025 limits:
$13.99 million per individual
$27.98 million for a married couple
This exemption covers the total value of gifts made during your lifetime and transfers made at death.
Even when you owe no tax, you must report gifts that exceed the annual limit to the IRS using Form 709, the U.S. Gift and Generation-Skipping Transfer Tax Return.
Gifts That Are Never Taxed
Certain gifts are completely exempt from gift tax, including:
Charitable contributions
Direct payments of another person’s education tuition (not room and board)
Direct payments of medical expenses to providers
Gifts between U.S. citizen spouses
Gifts to political organizations
Direct Gifts vs. Trust-Based Gifting
Giving directly—such as writing a check to a loved one—is the simplest form of gifting. However, it also means giving up all control over the assets. For those wishing to retain some oversight, gifts can be made through irrevocable trusts, which allow you to remove assets from your taxable estate while controlling how and when beneficiaries access those assets.
Trust-based gifting strategies can be powerful, but they come with complex legal and tax considerations, and should be implemented carefully with the help of an attorney.