Gift Tax

Gift tax is a federal tax on the transfer of money or property from one person to another when the giver receives nothing, or less than full value, in return. The tax applies to the donor, not the recipient. It is governed by the Internal Revenue Code and is closely linked to the federal estate tax system.

The gift tax exists to prevent individuals from avoiding estate taxes by transferring wealth during their lifetime rather than at death.

How the gift tax works

Each year, donors can give up to a set amount per recipient without triggering any reporting requirement. This is called the annual gift tax exclusion: $19,000 per recipient in 2025 and 2026. A married couple can combine their exclusions to give up to $38,000 to a single recipient in one year through gift splitting.

Gifts exceeding the annual exclusion must be reported to the IRS using Form 709. The excess is applied against the donor's lifetime gift tax exemption, which is unified with the federal estate tax exemption: $15 million per individual for 2026. The gift tax is only owed after a donor exhausts the lifetime exemption. Rates on taxable gifts range from 18% to 40%.

Key characteristics

• The donor pays, not the recipient. Recipients do not report gifts as income.
• The annual exclusion resets each year, allowing ongoing tax-free gifting.
• Certain transfers are fully exempt. Gifts to a U.S. citizen spouse, direct tuition payments to educational institutions, and direct payments to medical providers are excluded from gift tax entirely, regardless of amount.
• Fair market value governs. The IRS values gifts at fair market value on the date of transfer, not the donor's original cost basis.
• Unified with the estate tax. Taxable gifts made during life reduce the exemption available at death.

Common examples

• Cash gift: A parent gives a child $25,000. The first $19,000 is excluded; the remaining $6,000 is reported on Form 709 and applied against the lifetime exemption.
• Real estate transfer: A grandparent transfers a vacation property worth $300,000 to a grandchild for no consideration. The full fair market value is treated as a taxable gift.
• Below-market sale: A parent sells a home to an adult child for $200,000, even though its fair market value is $350,000. The $150,000 difference is treated as a gift.

Limitations and considerations

• Valuation disputes. The IRS may challenge the reported fair market value of non-cash gifts, particularly interests in closely held businesses or real estate. Proper appraisals matter for significant transfers.
• State-level gift taxes. Most states do not impose a separate gift tax. Connecticut is the only state that currently levies one.
• 529 plan contributions. A special rule allows donors to front-load five years of annual exclusions in a single 529 contribution, up to $95,000 per beneficiary in 2026, provided no additional gifts are made to that beneficiary during the five-year period.

Related terms

• Estate tax: The federal tax on assets transferred at death; shares a unified exemption with the gift tax.
• Final tax return: The income tax return filed for a deceased person.
• Exempt entity: Certain organizations, such as qualified charities, can receive gifts free of gift tax consequences.

FAQs about gift tax

Does the recipient ever owe gift tax?

Almost never. The donor bears the full tax obligation. The rare exception is a "net gift" arrangement, in which the recipient contractually agrees to pay the tax as a condition of receiving the transfer.

What happens if a donor fails to file Form 709?

The IRS can impose a failure-to-file penalty of 5% of tax due per month, up to 25%, plus interest. Unreported gifts also leave the donor's lifetime exemption inaccurately tracked, which can create disputes when the estate is eventually settled.

Do direct tuition payments count against the annual exclusion?

No. Payments made directly to an educational institution for tuition are fully excluded from gift tax and do not reduce the annual exclusion. The payment must go directly to the institution: reimbursing the student or funding a 529 plan does not qualify.