Understanding the Gift Tax: What You Need to Know - MABE International Advisors

Jul 14 2025 18:41

The federal gift tax works hand in hand with the estate tax to prevent people from avoiding estate taxes by giving away all of their money and property tax-free while theyre alive. Few people actually pay gift taxes, but all high-net-worth people need to be aware of them.
 

What Is a Gift?

 

A gift occurs when you give someone money or property for nothing or for less than its full value. For tax purposes, it doesnt matter whether you intend for the property to be a gift. It is treated as a gift if you dont receive full compensation for the property thats given.1

 

Any type of tangible or intangible property can be a giftfor example:

 

Cash

  • Stock
  • Cryptocurrency
  • Real estate
  • Art and collectibles
  • Business interests
  • Vehicles
  • Interest-free loans
  • Forgiving a debt
  • Irrevocably assigning a life insurance policy to another person
  • Making a non-commercial transfer of property into joint tenancy with another person (except for joint bank accounts)

 

You can give a gift to anyone; it doesnt have to be a relative like a child or grandchild. There is no legal limit on how much you can give.

 

You can make a gift directly to a person without restrictionfor example, write them a check. This is the simplest type of gift, but you lose control over the property involved.

 

For this reason, gifts are often made through various types of trusts. Irrevocable trusts (trusts you cant terminate or change) allow donors to remove assets from their taxable estates while maintaining control over how and when beneficiaries receive the gifted assets. Such trusts can come with complex rules.

 

Gifts Are Not Taxable Income

 

It might seem counterintuitive, but gifts are not taxable income to the people who receive them. In other words, they are tax-free to the recipient. Gift recipients (donees) need not report gifts on their tax returns.

 

Of course, if a recipient later sells gifted property and earns a profit, that profit is taxable income for the recipient.

 

Gifts to Individuals Are Not Tax-Deductible

 

Gifts to individuals are never tax-deductible by the giver. This is so even if the recipient is needy. Only gifts to qualified charitable organizationsSection 501(c)(3) organizationsare deductible. For example, you can deduct a gift to your local non-profit food bank, but not money or food you give to a homeless person.

 

The Federal Gift Tax

 

The federal gift tax exists to prevent tax-free transfers of limitless amounts of wealth while people are alive. The gift tax rate is based on the size of the gift and ranges from 18 percent to 40 percent. The tax is computed on a cumulative basis, taking into account taxable gifts made in prior years. The tax is paid by the donor (giver), not the gift recipient (unless the recipient agrees to pay the taxtermed a net gift).2

 

Few people ever pay gift taxes, because there are many exclusions and exemptions. But even if no gift tax is due, a donor can be required to file a gift tax return with the IRS.

 

The Annual Gift Tax Exclusion

 

The annual gift tax exclusion allows you to give a limited amount of money or property to any number of people each year without triggering gift tax consequences or reporting requirements. The purpose of the annual exclusion is to give taxpayers relief from reporting numerous small gifts, such as birthday and wedding gifts.

 

The exclusion is adjusted for inflation in $1,000 increments.3 For 2025, the gift tax exclusion is $19,000.

 

This means you can give up to $19,000 to as many different individuals as you wish during 2025 without having to file a gift tax return or pay gift taxes. Nor do such gifts reduce your lifetime estate and gift tax exclusion discussed below.

 

Example. Janet has three children. She gives each of them $19,000 in cash during 2025. The gifts are not subject to gift tax and need not be reported on a gift tax return. So, Janet has reduced her estate (and net worth) by $57,000 without any tax consequences.

 

If youre married, you and your spouse can combine your annual exclusionsa process called gift splitting. This doubles the amount a married couple can give each recipient, to $38,000 in 2025. Gift splitting is allowed even if the gift comes from only one spouses assets. Both spouses must consent to use gift splitting, and it will apply to all applicable gifts made during the year.

 

Example. James and Lisa are married with three children. They may give each child $38,000 during 2025 without any gift tax consequences. But they must each file a gift tax return consenting to the split, and they should file the two individual returns together to avoid receiving correspondence from the IRS.

 

The annual exclusion is use it or lose it: unused exclusion amounts dont carry forward to future years. If you use your annual exclusion every year, you can gift a substantial sum of money free of gift tax.

 

The Lifetime Estate and Gift Tax Exemption

 

Coupled with the annual gift tax exclusion is a single (unified) lifetime estate and gift tax exemption. The lifetime exemption is the total amount you can transfer during your life (as gifts) and at your death (through your estate), free from federal transfer taxes.

 

The unified exemption effectively shields a significant portion of wealth transfers from taxation. For 2025, the lifetime exemption amounts are $13.99 million per individual and $27.98 million per married couple.8 You can transfer up to that total amount tax-free during your life and at death.

 

Tax reform note. The U.S. House of Representatives has passed tax reform that would increase the lifetime exemption to $15 million per individual and $30 million per married couple beginning in 2026.9 The Senate Finance Committee version would do the same.

 

Gifts exceeding the annual exclusion amount ($19,000 in 2025) count against your lifetime exemption. When you exceed the exclusion, you may not owe gift tax immediately, but youre reducing the amount you can transfer tax-free upon death. You are also required to report such gifts by filing a gift tax return.

 

Example. During 2025, Jim and Liz gift their grandson $100,000 to help him purchase a home. Since the gift is $62,000 over their annual combined exclusion, they must report it on a gift tax return. The gift reduces their lifetime estate and gift tax exemption by $62,000.

 

The IRS tracks lifetime taxable gifts through the filing of Form 709, Gift Tax Return. If your total taxable gifts (the amount of gifts over the applicable annual exclusions) plus the value of your estate when you die exceed the lifetime exemption, the excess is taxed at rates ranging from 18 to 40 percent.

 

Example. Arthur, a single man, gifts $2 million over the annual exclusions to his 10 nieces and nephews over 10 years and leaves a $13 million estate when he dies in 2025. His total taxable gifts and estate amount to $15 million. This is $1.01 million over the $13.99 million lifetime exemption. His estate owes a $349,800 tax.

 

Key point. If you give away more than the lifetime exemption while youre alive, any additional gifts will be subject to gift tax.

 

Gifts Exempt from Gift Taxes

 

Certain types of gifts are completely exempt from gift taxes even if they exceed the annual exclusion. Such gifts, described below, are a great way to avoid gift and estate taxes.

 

·Gifts to charity. Gifts to qualified charitiesSection 501(c)(3) organizationsare exempt from the gift tax.12 Such gifts are deductible as charitable contributions.
 
·Gifts of tuition. Gifts of tuition are free of gift tax if they are made directly to an educational institution (not to the student involved).13 The student can be full- or part-time. The exclusion does not apply to books, supplies, dormitory fees, board, or other expenses that are not direct tuition costs.
 
 
·Gifts of medical expense payments. No gift tax is due if you pay a medical provider for someone elses qualified medical expenses. You must make the payment directly to the medical provider, not to the individual involved. Such medical expenses include any expense that would be deductible as an itemized medical deduction. They can also include health insurance payments.
 
 
·Gifts to spouses. There is an unlimited gift tax exclusion for transfers between spouses who are U.S. citizens. Gifts to a spouse who is not a U.S. citizen are exempt up to an annual limit$190,000 in 2025.
 
 
·Gifts to political organizations. No gift tax is due on gifts to qualified political organizations (Section 527 organizations). The gift must be used for political purposes.

 

Present Interest Rule

 

The annual gift tax exclusion applies only to gifts of present interestsi.e., the person who receives the gift has the right to use it immediately. Gifts that someone can use only in the futurenot when the gift is madedo not qualify for the annual gift tax exclusion. These are called gifts of a future interest and must be reported to the IRS on a gift tax return.

 

Example. Jane places $15,000 in an irrevocable trust to benefit her nephew, John. John, age 25, can use the principal from the trust only when he turns 30. This is a gift of a future interest because John has no right to the money when Jane gifts it. The gift does not qualify for the annual exclusion and must be disclosed on a gift tax return.

 

Planning note. Lawyers have devised various methods to get around the present interest rule and get the annual exclusion for a gift placed in trust.

 

One method is use of a Crummey trust, in which beneficiaries of an irrevocable trust are given a temporary right (typically 30 to 60 days) to withdraw the amount contributed to the trust. But the beneficiaries dont withdraw the gift; they let the time period lapse, and the gift becomes owned by the trust. Because the beneficiaries had a present right to withdraw the gift, it qualifies as a gift of present interest and gets the $19,000 exclusion.

 

Gifts to Minors

 

What about gifts to minors? They cannot, by law, be given full present access to, or control of, gifted property. A special rule allows gifts to minors to be treated as present interests that qualify for the annual exclusion if three conditions are met:21

 

1.The gift, and any income it produces, is retained in trust or a Uniform Transfers to Minors Act (UTMA) account for the minors benefit.
 
2.The remainder of the gift must go outright to the child no later than age 21 (so, the gift can go to the child at age 18-20).
 
3.If the child dies before reaching the age to receive the gift outright, the remainder of the gift must be paid to the childs estate.

 

Valuation of Gifts

 

For gift tax purposes, the value of the gift is generally the fair market value (FMV) of the property on the date of the gift. For publicly traded securities or cryptocurrency, FMV is straightforward. Valuation becomes more difficult for interests in closely held businesses, real estate, art, collectibles, or intangible assets.

 

Sophisticated high-net-worth donors often utilize valuation discountssuch as discounts for lack of marketability or minority interestto reduce the taxable value of transferred assets. These strategies should be supported by professional appraisals.

 

Gifting Strategies

 

Its best to gift property you expect to appreciate in the future. Giving it away now not only excludes its present worth from your estate but also eliminates the value of its likely future appreciation from your estate.

 

Example. Stan purchases 1,000 shares of a start-up company that he expects to explode in value over the next 10 years. He intends to leave the stock to his son Tom. If he waits until death to transfer the property, the market value of the stock at the time he dies will be included in his estate. If he gives it to Tom soon after buying it, all its appreciation in value, as well as its current worth, wont be included in his taxable estate.

 

On the other hand, it is not a good strategy to gift property that has already appreciated in value. The recipient of a gift will have the same tax basis in the property as the giver (usually the cost of the property). A person who inherits a gift, on the other hand, obtains a basis that is stepped up to the fair market value of the property at the time of death. This can vastly reduce the tax due when the inheritor sells the property.

 

Example. Ben owns 1,000 shares of Amazon stock that he bought years ago for $20 per share. Today it’s worth $200 per share. If he gifts the stock to his son John, Johns basis will be $20 per share. If John sells the stock, he must pay tax on his $180-per-share profit. If Ben leaves the stock to John in his will, John will get a stepped-up basis to its current $200 value. If he sells it, hell owe little or no tax.

 

Takeaways

 

Here are five takeaways from this article:

 

1.A gift occurs when you give money or property to a person for nothing in return or for less than full value. You can give gifts to anyone, and there is no annual limit on gift giving.

 

2.Gifts are not taxable income to the recipient and are not deductible by the giver.

 

3.A federal gift tax of 18 to 40 percent applies to gifts that exceed the lifetime estate and gift tax exemptionin 2025, $13.99 million per individual and $27.98 million per married couple.

 

4.There is an unlimited annual gift tax exclusion in 2025 of $19,000 for individuals and $38,000 for married couples. You can give this amount to any number of people without reducing your lifetime estate and gift tax exemption.

 

5.Certain types of gifts are not subject to the gift tax at all. These include gifts to charity, paying a persons education tuition, paying anothers medical bills, gifts between spouses, and gifts to political organizations.