Gift Tax Rules

The federal gift tax is a tax on transfers of money or property from one person to another without receiving full value in return. It exists to prevent people from avoiding estate tax by giving away assets before death.

The donor (person giving the gift) is responsible for paying gift tax — not the recipient. Most people never actually pay gift tax because gifts must exceed both the annual exclusion and the lifetime exemption before any tax is due.

• Cash gifts: Fully subject to gift tax rules.
• Property gifts: Valued at fair market value on the date of the gift.
• Below-market loans: The forgone interest may be treated as a gift.

Tip: Gifts to a spouse who is a U.S. citizen are completely unlimited and free of gift tax under the unlimited marital deduction.

The IRS allows two layers of protection before gift tax applies. The annual exclusion lets you give a set amount to any number of individuals each year with no reporting required. The lifetime exemption (unified with the estate tax exemption) covers cumulative gifts above the annual exclusion.

Protection Layer	2025 Amount	Notes
Annual exclusion per recipient	$19,000	Indexed to inflation; no limit on number of recipients
Lifetime exemption (unified)	$13,990,000	Shared with estate tax exemption; resets at death
Medical exclusion	Unlimited	Must pay provider directly
Education exclusion (tuition)	Unlimited	Must pay institution directly

Only after exhausting the $13.99 million lifetime exemption does a donor actually owe gift tax at rates up to 40%.

A taxable gift is any transfer of property — including cash, stocks, real estate, or forgiven debt — where the donor receives less than fair market value in return.

• Selling below market value: A $500,000 home sold to a child for $300,000 creates a $200,000 taxable gift.
• Interest-free loans: Loans below the IRS Applicable Federal Rate (AFR) impute interest as a gift.
• Paying someone else's bills: Generally a gift unless it qualifies for the medical or educational exclusion.
• 529 superfunding: Up to $95,000 per beneficiary ($19,000 × 5 years) can be front-loaded using the 5-year election.

Political contributions, transfers to charities, and tuition paid directly to a school are not taxable gifts.

Warning: Forgetting that an interest-free family loan counts as a gift is a common mistake — document loans with a promissory note and charge at least the AFR.

Gift splitting allows married couples to treat a gift made by one spouse as if each spouse gave half. This effectively doubles the annual exclusion from $19,000 to $38,000 per recipient even when only one spouse funds the gift.

Scenario	Without Splitting	With Splitting
Gift to one recipient	$19,000 tax-free	$38,000 tax-free
Gift to 3 recipients	$57,000 tax-free	$114,000 tax-free
529 superfunding (one child)	$95,000 tax-free	$190,000 tax-free

To elect gift splitting, both spouses must consent on Form 709 for the year in question — even if the split gift doesn't exceed the annual exclusion. Both spouses must be U.S. citizens or residents, and neither can transfer the gifted property to the other spouse.

Form 709 (United States Gift and Generation-Skipping Transfer Tax Return) must be filed when:

• You give more than $19,000 to any one person in a calendar year.
• You and your spouse are electing gift splitting.
• You make gifts to a trust or to someone who is more than one generation below you (generation-skipping).

Form 709 is due by April 15 of the year following the gift (the same deadline as your income tax return). You can request a 6-month extension using Form 4868 or Form 8892. Filing does not mean you owe tax — it just tracks cumulative gifts against the lifetime exemption.

Tip: Keep records of all large gifts, including the date, amount, recipient, and description of property. The IRS can audit gift tax returns for up to 3 years (or indefinitely if no return was filed).

Filing Trigger	Form 709 Required?
Gift of $10,000 to a friend	No
Gift of $25,000 to a child	Yes
$20,000 tuition paid to university	No (direct payment)
Gift splitting with spouse	Yes (both spouses)