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The gift tax is a federal levy on the transfer of money or property to another person when equal value is not received in return. While it may sound cumbersome, most Americans will never pay a cent in gift taxes to Uncle Sam due to several key IRS rules. The IRS provides an annual exclusion and a lifetime exemption that reduce or eliminate a person’s potential gift tax liability. For 2025 and 2026, the gift tax exemption is $19,000.
A financial advisor with estate and tax planning expertise can help you manage your gift tax and estate tax liabilities.
What Is the Gift Tax?
When a person gives money or property to someone other than their spouse or dependent, they may be required to pay gift tax. This federal excise tax starts at 18% and can reach 40% on certain gift amounts once you exceed both the annual exclusion and your lifetime exemption. The responsibility for paying the tax typically lies with the donor, not the individual receiving the gift. While recipients don’t face any immediate tax consequences, they may have to pay capital gains tax if they sell gifted property in the future.
Not all gifts are subject to this tax, though. Certain gifts are entirely free of tax, including the following: 1
- School tuition and education payments
- Charitable donations
- Medical expenses
- Political contributions
- Gifts to spouses and dependents
The gift tax does not play a significant role in the finances of most Americans because of two key IRS provisions: the annual gift tax exclusion and lifetime exemption.
Annual Gift Tax Exclusion
The IRS allows individuals to give away a specific amount of assets or property each year tax-free. For 2025 and 2026, the annual gift tax exclusion is $19,000. This means a person can give up to $19,000 to as many people as they without having to pay any taxes on the gifts. For example, a man could give $19,000 to each of his grandchildren in 2025 or 2026 with no gift tax implications.
But perhaps that same man chooses to give each grandchild $22,000 instead, exceeding the 2025/2026 exclusion limit by $3,000 per person. In this scenario, grandpa would have to report the gift and could even owe gift taxes on the $3,000 overage, but only if he has surpassed the lifetime exemption, which we’ll go over below.
For married couples, each spouse may give away $19,000 tax-free in 2025/2026. This would allow each spouse to combine their $19,000 limit to give up to a total of $38,000 to each of their gift recipients in 2025/2026.
Lifetime IRS Gift Tax Exemption
If a gift exceeds the $19,000 limit for 2025, that does not automatically trigger the gift tax. For 2025, the IRS allows a person to give away up to $13.99 million in assets or property over the course of their lifetime and/or as part of their estate. For 2026, that lifetime exemption increases to $15 million per individual (or $30 million for a married couple) under the One Big Beautiful Bill Act (OBBBA). If a gift exceeds the annual exclusion limit, the difference is simply subtracted from the person’s lifetime exemption limit and no taxes are owed.
Consider this example for the 2025 tax year: Susan decides to gift her granddaughter $30,000 for a car as a college graduation present. Susan’s gift would exceed the 2025 gift exclusion limit of $19,000 by a total of $11,000, but she wouldn’t owe additional taxes. That’s because she would report the gift to the IRS using Form 709 and deduct the $11,000 overage from her $13.99 million lifetime exemption instead. As a result, she would still be eligible to give away up to $13,979,000 tax-free.
IRS Gift Limit Example
2025
| Gift Value | 2025 Annual Gift Tax Exclusion | Taxable Amount | 2025 Lifetime Gift Tax Exemption | Remaining Exemption |
|---|---|---|---|---|
| $30,000 | $19,000 | $11,000 | $13,990,000 | $13,979,000 |
2026
| Gift Value | 2026 Annual Gift Tax Exclusion | Taxable Amount | 2026 Lifetime Gift Tax Exemption | Remaining Exemption |
|---|---|---|---|---|
| $30,000 | $19,000 | $11,000 | $15,000,000 | $14,989,000 |
It’s important to remember that a person’s lifetime exemption limit applies to gifts that a person gives while still alive and any property left to heirs as part of an estate plan.
How to Calculate the IRS Gift Tax
As you can see, only people with millions of dollars to give away are subject to the federal gift tax. But if you’re one of those fortunate people, calculating your gift tax liability isn’t overly difficult.
Like federal income tax, gift tax rates are marginal, with the top rate reaching 40%. The larger a gift is, the more a person will potentially pay in taxes. But remember, you don’t have to pay gift taxes until someone exceeds their lifetime exemption.
After eclipsing this lifetime limit, taxes will be due on gifts that surpass the annual exclusion limit ($19,000 in 2025/2026). To calculate their tax liability, the donor would use the following tax brackets.
| Taxable Amount Exceeding Lifetime Exemption Limit | Gift Tax Rate |
|---|---|
| $0 – $10,000 | 18% |
| $10,001 – $20,000 | 20% |
| $20,001 – $40,000 | 22% |
| $40,001 – $60,000 | 24% |
| $60,001 – $80,000 | 26% |
| $80,001 – $100,000 | 28% |
| $100,001 – $150,000 | 30% |
| $150,001 – $250,000 | 32% |
| $250,001 – $500,000 | 34% |
| $500,001 – $750,000 | 37% |
| $750,001 – $1,000,000 | 39% |
| $1,000,000+ | 40% |
When Does the Gift Tax Actually Apply?
Many people assume that any gift above the annual exclusion triggers immediate tax, but that is not how you calculate gift tax. A gift that exceeds the $19,000 limit for 2025 and 2026 must be reported on Form 709, yet reporting does not by itself create a tax bill. The IRS uses the form to track how much of your lifetime exemption has been used, and most donors remain far below that threshold.
A donor owes gift tax only after exceeding the lifetime exemption, which is $13.99 million in 2025 and $15 million in 2026 under the One Big Beautiful Bill Act’s tax savings. Until that point, amounts above the annual exclusion simply reduce the remaining exemption. This structure means that large gifts often have no immediate tax cost as long as the donor’s total lifetime gifting and estate transfers stay under the limit.
A common misconception is that the recipient is responsible for gift tax or must report the gift as income. The tax obligation falls on the donor, not the recipient, and the recipient generally does not report the transfer on their tax return. Another misconception is that failing to file Form 709 helps someone avoid future tax. In reality, the IRS can assess penalties for failing to file, and the unreported gifts still count toward the donor’s lifetime exemption.
Another point of confusion concerns property that has appreciated in value. Even though the recipient does not pay gift tax, they may pay capital gains tax if they later sell the property for more than the donor’s original basis. Donors who want to help family members financially may prefer to transfer cash instead of appreciated assets to avoid passing along a low cost basis. Understanding how the filing rules work can help donors make gifts without unexpected tax issues.
Bottom Line
Understanding the federal gift tax matters for high-net-worth and charitable givers, but most people will never owe this tax. The IRS allows you to give up to $19,000 in 2025 and $19,000 in 2026 to as many individuals as you choose each year ($18,000 in 2024). The lifetime exemption also shields large amounts from tax, rising to $13.99 million in 2025 and $15 million in 2026 under the One Big Beautiful Bill Act. If a single gift exceeds the annual exclusion, you must file Form 709 to report it, though the excess simply reduces your remaining lifetime exemption.
Tax Planning Tips
- A financial advisor with tax expertise can potentially help you optimize your financial plans for taxes. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s income tax calculator can help you gauge how much you’ll owe come tax time.
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Article Sources
All articles are reviewed and updated by SmartAsset’s fact-checkers for accuracy. Visit our Editorial Policy for more details on our overall journalistic standards.
- “Frequently Asked Questions on Gift Taxes | Internal Revenue Service.” Home, https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes. Accessed 12 May 2025.