How to Avoid the Gift Tax

The gift tax is a federal tax on money or assets given from one person to another without equal value in return. It applies to things like cash, stocks, or real estate, and the donor pays it, not the recipient. In practice, very few people ever owe gift tax because of the high lifetime exclusion. The tax mainly exists to stop wealthy families from avoiding estate taxes by giving away large amounts before death. A financial advisor can help you understand the rules, track your exemptions and create a strategy for giving that fits your overall estate plan.

What Is the Gift Tax?

Per the IRS, this is a tax levied on “[a]ny transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.” If you give something of value and get less than it is worth in return, it is considered a gift and may be taxable under this law.

Importantly, this applies if you give something of value and get a nominal amount in return. (In law this is called a “de minimis” transaction.) For example, say you want to give your children the family house. Instead of giving it outright you sell it to them for $100. You do this because ordinarily a property sale doesn’t trigger the gift tax. From a legal standpoint the parties have exchanged assets so the only relevant tax would be on any capital gains.

However, in this case the sale price had no bearing on the fair market value of the property (otherwise known as “full consideration”). As a result you would owe taxes on the difference between the house’s sale price ($100) and its fair market value. Structuring this sale specifically to avoid the gift tax would be a form of felony tax fraud. This is a particularly common type of tax evasion among family businesses and within closely held real estate companies.

Should you owe gift taxes, the applicable tax rates range from 18% to 40%, depending on the amount of the taxable gift.This is a progressive tax, meaning that each bracket only applies to its segment of value. For example, no matter how much you give as a gift, you only pay 18% on the first $10,000.

Gift Tax Exclusions

As noted in our introduction, the person who gives the gift owes any relevant taxes. However, you don’t owe taxes on any gift that falls within an applicable exclusion. The gift tax comes with two forms of exclusions, the annual exclusion and the lifetime exclusion. The annual exclusion is the amount of money or value that you can give each year without affecting your gift tax status overall; the lifetime exclusion is the amount of money or value that you can give over a lifetime after applying the annual exclusion before you begin to owe gift taxes.

Lifetime Exclusion

The IRS allows you to give a certain amount of money or assets over the course of your lifetime tax-free. This is called the “lifetime exclusion,” and it’s the amount that you can give before you have to start paying gift taxes.

Each year, when you give a gift, you first apply the annual exclusions then apply any overages to your lifetime exclusion. Then if you have exceeded both that year’s annual exclusion and your overall lifetime exclusion, you would owe taxes on any overages.

Annual exclusions apply per donee, meaning that the annual exclusion is the amount of money you can give to any individual each year before affecting either your lifetime exclusion or your taxes. The lifetime exclusion applies per-donor, meaning that this is the amount of money in total that you can give tax-free over your lifetime.

In 2025 the annual gift tax limit is $19,000, while the lifetime exclusion is $13.99 million, although the One Big Beautiful Bill Act (OBBA) will increase this total to $15 million in 2026. The current rates apply per individual, so for a married couple filing jointly in 2025 these numbers are $38,000 and $27.98 million, respectively.

So, for example, say that in 2025 you gave each of your three children $25,000. With an annual exclusion of $19,000, this would have the following tax consequences:

Annual exclusion. You first apply the entire annual exclusion of $19,000 per person. Since this is per recipient it applies to each of your gifts, so your gifts exceed the annual exclusion by $6,000 per child.
Lifetime exclusion. Your three gifts exceed the annual exclusion by a combined $18,000 (at $6,000 per child times three children). You deduct all three of those from your lifetime exclusion, which is per donor, reducing your lifetime exclusion to $13,972,000 (the starting exclusion of $13,990,000 less the $18,000 overage).
Taxes owed. You would owe no taxes on this gift, since you have not yet exceeded your lifetime exclusion.

If your gift(s) exceed the annual exclusion and you have used up your lifetime exclusion, you will owe taxes on the difference. As its name suggests, the lifetime exclusion applies over the course of your lifetime. This means that if, over a span of decades, you gradually use up this exclusion, you may eventually start to owe taxes on your various gifts.

For example, say that you give each of your three children $5,019,000 in 2025. You would owe taxes on:

$5,019,000 – $19,000 (annual exclusion) = $5 million per child
$5 million x 3 children = $15 million in total gifts above the annual limit
$13.99 million (your lifetime exclusion) – $15 million = -1.01 million
You would owe taxes on the $1.01 million difference between your gift and the total allowed exclusions.

The gift tax does not apply between spouses, nor does it apply to anyone whom you claim as a dependent on your taxes. This combination of rules explains why few households ever see gift tax liability. In order to trigger the gift tax, you would need to give someone more than the lifetime exclusion.

Structuring Gifts

The best way to avoid paying the gift tax is to structure your gifts over time. If you are giving someone liquid assets, like cash or investment securities, doing so on an annual basis is a good way to avoid triggering gift tax liability. The annual exclusion refreshes, so you can give up to that amount every year without any tax consequences.

Where this often becomes a problem is when it comes to transferring large, unified assets like a piece of real estate or a family business. You can’t break a house up into parcels of $15,000, so this generally will need to be a lump sum transaction. If the value of the property exceeds the lifetime exclusion, you may not be able to avoid paying taxes on some of it.

Some households try to avoid gift tax by breaking up ownership of large assets. For example, you might give your two children joint ownership of the family house. The IRS would see this as each child receiving 50% of the property’s value. This means you could give them a home worth $27.98 million with no taxes, and if you are married, you and your spouse could give them a home worth $55.96 million without triggering tax consequences.

Another method is called a chained gift. In this case, a donor gives part of an asset to someone else, who then transfers it to the intended recipient. For example, Steve wants to give his daughter Rebecca a $20 million house. He transfers ownership jointly to Rebecca and his friend Robert. The IRS values this as $10 million to each person, keeping Steve under his lifetime exclusion. Robert then uses his own exclusion to transfer his share of the house to Rebecca. On paper, Rebecca now owns the entire house without tax consequences.

In reality, chained gifting requires an unusual level of trust and may not be legal depending on the circumstances. The IRS may challenge such an arrangement, and the risks are significant. For that reason, anyone considering this type of transfer should consult a qualified tax attorney before taking any action.

Specific Circumstances

Two specific circumstances require additional note:

Tuition and medical bills. These are generally exempted from the gift tax regardless of the recipient.
Securities. If you give someone securities or other investments, the cost basis for the asset is its value at the time of the transfer, not at the time when the person giving the securities bought them.

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

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