Gift Tax Explained
The federal gift tax and estate tax share a unified exemption. Understanding how gifts work is essential to effective estate planning.
The Basics
The federal gift tax applies when you transfer property to someone without receiving full value in return. However, most gifts never trigger actual tax liability because of two powerful exclusions:
- Annual exclusion: $18,000 per recipient per year (2025). You can give this amount to as many people as you want without using any of your lifetime exemption.
- Lifetime exemption: $13.99 million (2025). This is unified with the estate tax exemption, every dollar you use for gifts reduces the exemption available at death.
The Gift-Estate Connection
This is the critical point most people miss: the gift tax and estate tax share the same exemption. If you gift $5 million during your lifetime (above the annual exclusion), your remaining estate tax exemption drops from $13.99M to $8.99M.
This is why estate planning attorneys consider lifetime gifts and death transfers together, they're different chapters of the same tax story.
Annual gift-tax exclusion history
| Year | Per-recipient exclusion | Married couple split |
|---|---|---|
| 2018 | $15,000 | $30,000 |
| 2022 | $16,000 | $32,000 |
| 2023 | $17,000 | $34,000 |
| 2024 | $18,000 | $36,000 |
Eighteen thousand dollars per recipient, every year, no paperwork required.
What Counts as a Taxable Gift?
- Cash gifts above $18,000/year to a single recipient
- Below-market loans (the forgone interest is a gift)
- Transferring property at below fair market value
- Adding someone to a bank account or property deed
- Paying someone's expenses (except medical or tuition paid directly to the institution)
What Doesn't Count?
- Gifts to your spouse (unlimited marital deduction, for US citizen spouses)
- Gifts to qualified charities
- Tuition paid directly to an educational institution
- Medical expenses paid directly to the provider
- Political contributions
- Gifts within the annual exclusion ($18,000/person/year)
Gift Splitting for Married Couples
Married couples can "split" gifts, meaning each spouse is treated as making half the gift. This effectively doubles the annual exclusion to $36,000 per recipient per year. Gift splitting requires filing Form 709 even if no tax is due.
The 2026 "Sunset" and Gift Planning
The TCJA's doubled exemption ($13.99M in 2025) was scheduled to sunset after 2025 and revert to roughly $7 million. That did not happen: the One Big Beautiful Bill Act (July 2025) repealed the sunset and set a permanent $15 million per-individual exemption ($30 million per couple) effective 2026, indexed for inflation. The old year-end "use it or lose it" pressure no longer applies.
The IRS has confirmed through regulations that gifts made under a higher exemption will NOT be "clawed back" if the exemption later decreases. With the exemption now a permanent $15 million, no decrease is currently scheduled, but the anti-clawback rule remains the IRS position should the law change in the future.
Lifetime gifting can still be worthwhile for larger estates, because it removes future appreciation from the taxable estate and can help with state-level estate taxes and non-tax goals.
Filing Requirements
You must file Form 709 (United States Gift Tax Return) if you:
- Give any individual more than $18,000 in a year
- Gift-split with your spouse
- Give a future interest gift (even if under $18,000)
- Transfer to a trust (even within the annual exclusion, in some cases)
Form 709 is filed with your income tax return. The filing deadline is April 15 (or with extension).