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Understanding the Gift Tax
The gift tax is a federal tax applied to certain assets transferred from one person to another. However, most taxpayers will never have to worry about paying the gift tax, which only comes into play when you make more than $13.61 million in gifts over your lifetime. Here’s everything you need to know.
What Is the Gift Tax?
The gift tax is a tax on the transfer of property from one person to another without the donor receiving anything—or less than the full value of the gift—in return. This can include cash, investments, real estate, art, and more. The IRS considers any such transfer as a gift even if the donor didn’t intend it to be one. Exceptions include:
- Charitable gifts: Gifts made to a charitable organization are not subject to the gift tax and can be deducted on your tax returns.
- Spousal gifts: Gifts to a U.S. citizen spouse are generally not reportable. For a foreign citizen spouse, you can gift up to $185,000 in 2024 without it counting against you.
- Educational expense gifts: Tuition paid directly to an eligible educational institution is not considered a gift. This does not apply to other educational costs like books, supplies, and room and board.
- Medical expense gifts: Medical expenses paid directly to a healthcare provider on behalf of someone else are not considered gifts, provided they are not reimbursed by the recipient’s health insurance plan.
How Much Can You Gift Tax-Free?
The IRS sets both annual and lifetime exemptions for the gift tax. In 2024, individuals can give gifts of up to $18,000 per person without incurring the gift tax. For married couples filing jointly, this amount doubles to $36,000. Exceeding this threshold reduces your lifetime exemption amount, which is $13.61 million in 2024. This exemption applies to both gift and estate taxes.
For example, if you give your child a car worth $20,000, the gift exceeds the annual exclusion limit by $2,000, reducing your lifetime limit by the same amount. If you exhaust the full lifetime exemption, any additional gifts will be subject to the gift tax.
How Much Is the Gift Tax Rate?
If you exceed the lifetime exemption threshold, additional gifts will be taxed based on the amount of the taxable gift:
| Taxable Amount | Marginal Tax Rate |
|---|---|
| $0 — $9,999 | 18% |
| $10,000 — $19,999 | 20% |
| $20,000 — $39,999 | 22% |
| $40,000 — $59,999 | 24% |
| $60,000 — $79,999 | 26% |
| $80,000 — $99,999 | 28% |
| $100,000 — $149,999 | 30% |
| $150,000 — $249,999 | 32% |
| $250,000 — $499,999 | 34% |
| $500,000 — $749,999 | 37% |
| $750,000 — $999,999 | 39% |
| $1 million and up | 40% |
How to Avoid the Gift Tax
Most Americans will never encounter the gift tax due to the exclusions and exemptions. However, to ensure you stay clear of it, consider these steps:
- Stay under the annual exclusion limit: For 2024, this limit is $18,000. Keep your gifts below this amount each year.
- Split the gift: Married couples filing jointly can gift up to $36,000 in 2024, provided the spouse agrees not to gift the same person in the same year. This must be reported, and the spouse must show agreement.
- Make eligible gifts: Charitable donations, most spousal gifts, tuition paid directly to schools, and unreimbursed medical expenses paid directly to healthcare providers are exempt from the gift tax.
For more complex strategies, consult a tax professional.
Do You Pay Taxes When You Receive a Gift?
Generally, no, you don’t pay gift taxes when you receive a gift. However, certain gifts may be subject to other taxes. For instance, if you receive stock, other investments, or property as a gift, you may owe taxes when you sell the asset. Consult a tax professional for more details.
The Bottom Line
The gift tax is a complex part of the tax code, but most taxpayers don’t need to worry about it. If you have a high net worth and are concerned about the gift tax, consult with a tax professional and an estate planning expert to ensure your assets are transferred without unnecessary tax burdens.
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