How to Avoid the Gift Tax

The federal gift tax applies to most types of assets, including cash, securities and real estate, and is intended to prevent wealthy households from avoiding estate taxes by transferring assets before death. When the tax applies, the donor is responsible for payment, not the recipient. In most cases, recipients owe no tax unless they later sell the asset for a gain. Because of high annual and lifetime exclusions, only the largest estates are affected, and most households never face gift tax liability. A financial advisor can help you plan wealth transfers and manage tax-efficient strategies for gifts to family or loved ones.

What Is the Gift Tax?

According to the IRS, the gift tax applies when one person transfers property or money to another without receiving equal value in return¹. This covers all types of property and includes situations such as selling an asset for less than its market value or making an interest-free or reduced-interest loan.

The gift tax rule also applies when you sell an asset far below its market value. For example, if you sell your child a house worth $500,000 for $100, the IRS would treat the $499,900 difference as a taxable gift. Structuring transactions to disguise gifts or avoid the tax can constitute tax fraud.

Gift tax rates range from 18% to 40% and are based on the combined size of your taxable estate, including lifetime gifts. The system is progressive: each rate applies only to the corresponding portion of taxable value.

Gift Tax Exclusions

The donor is responsible for any taxes that may apply, but most gifts fall within exclusions. The gift and estate taxes are part of a unified system with two key exclusions: the annual exclusion and the lifetime exclusion.

The annual exclusion is the amount that you can give each recipient in a single year without reducing your lifetime limit. The lifetime exclusion is the total amount that can be transferred, both during life and at death, before estate or gift tax becomes due.

Lifetime Exclusion

The IRS combines the gift and estate tax under one unified system. This means that the lifetime exclusion applies to both the total value of taxable gifts made during life and the value of your estate at death. You do not pay tax on gifts as you make them unless your cumulative lifetime gifts and estate value exceed this combined limit.

Each year, when you give a gift, you first apply the annual exclusion amount per recipient. Any excess above that amount reduces your available lifetime exclusion. If, at the time of your death, the total of all taxable gifts and your remaining estate exceeds the lifetime limit, your estate will owe tax on the amount above that threshold.

Annual exclusions apply per donee, meaning you can give up to the annual limit to each individual without affecting your lifetime exemption. The lifetime exclusion applies per donor, covering the total value of all lifetime gifts plus the estate’s value. In 2025, the annual exclusion is $19,000 per recipient, and the unified lifetime gift and estate exclusion is $13.99 million per person. For a married couple, these figures double to $38,000 and $27.98 million, respectively.

Beginning in 2026, the One Big Beautiful Bill Act (OBBBA) sets the unified exclusion at $15 million per individual, indexed for inflation. This permanently prevents the previously scheduled reduction under prior law.

For example, in 2025, if you give each of your three children $20,000, your annual exclusion covers $19,000 per child. The remaining $1,000 per child, or $3,000 total, reduces your lifetime exclusion from $13,990,000 to $13,987,000. Although a gift tax return must be filed when you exceed the annual limit, no tax is due because your total lifetime gifts remain below the unified exclusion.

If, over time, your cumulative taxable gifts and estate value exceed the exclusion, your estate would owe tax on the excess at rates ranging from 18% to 40%.

Transfers between U.S.-citizen spouses are unlimited and tax-free. Ordinary support payments for dependents are not counted as gifts, but large, separate transfers of cash or property to a dependent do apply toward the annual and lifetime limits. Because of these generous exclusions, few households ever face federal gift tax liability.

Structuring Gifts

The most effective way to reduce potential gift tax liability is to plan gifts gradually over time rather than in large amounts. If you plan to transfer liquid assets such as cash or investment securities, giving on an annual schedule allows you to use the annual exclusion each year. The exclusion resets every calendar year, permitting you to give up to that limit to each recipient without affecting your lifetime exclusion or creating a tax obligation.

Transferring large assets such as a house or family business presents different challenges. Because real property cannot be divided into small portions, these gifts often exceed the annual exclusion and count toward your lifetime limit. If the value of the property exceeds your remaining lifetime exclusion, your estate may eventually owe taxes on the portion above the limit.

Some families transfer fractional ownership interests in large assets to stay within the rules. For example, parents may give their two children joint ownership of a home. Each child would receive a 50% share, valued at half the property’s fair market value. In 2025, a married couple could jointly transfer a home worth $55.96 million to two children without triggering gift taxes, provided they have not made other taxable gifts or left a taxable estate.

Using chained gifts to exceed the lifetime exclusion is risky and may not hold up under IRS scrutiny. If Steve gives a $20 million home jointly to his daughter Rebecca and his friend Robert, the IRS would attribute $10 million of the transfer to Steve. Because the lifetime exclusion applies to the donor, not the recipient, Steve would still exceed his available limit by $5 million. If Robert later transfers his share to Rebecca, that transfer would count as a new gift under Robert’s exclusion. Complex arrangements of this kind require guidance from a tax professional.

Few deductions or exceptions apply to the gift tax. Maintaining records of annual transfers and tracking the remaining lifetime exclusion can help households manage compliance and avoid unexpected tax exposure.

Gift Splitting and Portability

Married couples can work together to reduce or avoid gift and estate taxes. Two main tools help: gift splitting and portability. Both allow families to move more wealth without hitting tax limits too quickly.

• Gift splitting. Gift splitting lets both spouses be treated as if they gave a gift, even if the money or property came from only one of them. For example, in 2025 the annual exclusion is $19,000 per person. That means you can give your child $19,000 with no tax issues. But if you and your spouse agree to split the gift, the same child can receive $38,000 in one year tax-free. To make this official, both spouses need to file IRS Form 709. Couples may want to use gift splitting when one spouse has most of the assets but they want to take full advantage of both partners’ exclusions.
• Portability. Portability applies after one spouse dies. If the first spouse does not use their full lifetime exemption, the unused part can be passed to the surviving spouse. For example, if the lifetime exemption is $13.99 million and the deceased spouse used $5 million, the survivor can add the leftover $8.99 million to their own exemption. This gives them a much higher tax-free transfer limit. To use portability, the executor must file IRS Form 706 for the estate. Families often rely on portability when they want to protect large estates from federal estate taxes.
• Using both together. Some couples use both gift splitting and portability. For instance, while both spouses are alive, they may split gifts to children or grandchildren each year, doubling the tax-free amount. Later, if one spouse passes away, portability lets the survivor carry over any unused exemption. This two-part approach helps families pass down wealth during life and after death without paying unnecessary taxes.

These strategies are most useful for households with significant wealth. Most people never reach the federal limits, but high-net-worth individuals often plan carefully around them. By using gift splitting and portability, couples can coordinate their giving and estate plans to move more money to loved ones while staying within the rules.

Bottom Line

The gift tax is a federal tax on transfers where something of value is given without equal return. It exists to stop wealthy families from avoiding the estate tax by giving away assets during their lifetime. In 2025, the lifetime gift and estate tax exclusion is $13.99 million per person, or about $27.98 million for a married couple. Annual exclusions also allow up to $19,000 per recipient to be given each year without reducing the lifetime limit. These high thresholds mean the gift tax generally applies only to very large estates.

Tips on Taxes

• Structuring your finances can make an absolute world of difference, but it isn’t always easy. The best way to approach this complicated issue is with smart, sound planning. That’s where financial advisors can be so valuable. 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.
• Income in America is taxed by the federal government, most state governments and many local governments. The federal income tax system is progressive, so the rate of taxation increases as income increases. Use our free calculator to estimate your federal income taxes.

Photo credit: ©iStock.com/CatLane, ©iStock.com/syahrir maulana, ©iStock.com/KvitaJan