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If you recently received a sizable gift from Mom and Dad, don’t fret about the gift tax. The IRS generally holds the giver liable for taxes. And unless the person is handing over a small fortune, he or she won’t owe any gift taxes either. But if your parents are being generous, you might want to fill them in on how the IRS views the transfer of money. This article will help you understand the gift tax, but since rules behind calculating gift tax can be complex, your parents may want to consider finding a financial advisor if they make large or numerous financial gifts.
What Is the Gift Tax?
The IRS may impose a gift tax on someone who transfers money or property to another person without getting something of at least equal value in return. However, that action depends on the amount. The IRS basically ignores gifts that don’t breach the annual gift tax exclusion.
What Is the Gift Tax Exclusion for 2025 (Filed in 2026)?
For the tax year 2025, an individual could give up to $19,000 per person without informing Uncle Sam or paying taxes. But even if your parent exceeds the annual exclusion limit, he or she may just need to file some paperwork. Your parent generally won’t owe an actual out-of-pocket tax payment unless gifts for the year push him or her beyond their lifetime gift tax exemption limit, which stands at $13.99 million for the tax year 2025.
This means your parent could give $19,000 to you and any other person in 2025 without paying taxes on the money. But let’s say your dad gives you $20,000 after your wedding. At this point, he made a taxable gift. But it doesn’t necessarily mean he has to write a check to the IRS that year because of his gift. However, he has to file a gift tax return and fill out IRS Form 709.
The government requires this in order to keep track of your parent’s lifetime gift tax exemption. That’s where many people get confused. But the rules are pretty straightforward. Let’s break it down.
How Does the Lifetime Gift Tax Exemption Work?
For tax year 2025 (returns filed in 2026), the lifetime gift tax exemption is a hefty $13.99 million for individuals and $27.98 million for married couples filing jointly. You can think of the annual gift tax exclusion as adding to the lifetime exemption (which also applies for the federal estate tax).
For example, let’s say Mom gave you a total of $28,000 in gift money in 2025. She has to file IRS Form 709 to file the gift because she used up her $19,000 annual exclusion for the year. But she likely won’t owe any taxes on that gift. The excess amount ($28,000-$19,000=$9,000) simply reduces the amount of money she can give away tax-free over her lifetime:
$13,990,000 – $9,000 = $13,981,000
As a result, her lifetime gift tax exemption drops to $13,981,000. She can continue making gifts and only worry about some extra paperwork. Unless the sum of all of the gifts she makes during her lifetime exceeds this limit, she’s in the clear.
You should note that the lifetime gift tax exemption wasn’t always that high. It rose with the Tax Cuts and Jobs Act (TCJA). And starting in 2026, the One Big Beautiful Bill Act (OBBBA) raises the estate tax exemption to $15 million and indexes it for inflation thereafter.
What Doesn’t Count Toward the Gift Tax?
The IRS never taxes some specific transfers of cash or property regardless of amount. You can avoid gift taxes when making gifts toward the following:
- Spouse
- Political organizations
- Tuition and medical expenses on behalf of someone else
When paying for someone’s tuition or medical bills, it’s best to forward those payments directly to the institution to avoid any hassles with the IRS. So if you have a tuition bill coming in and your parents want to cover it, simply tell them to send the money directly to the school. If they forward it to you first, they’d likely have to fill out some extra paperwork. They may also reduce their lifetime gift tax exemption when they could have easily avoided it.
Who Pays the Gift Tax?
If a gift triggers an actual tax bill from the IRS, the donor is the person who’s responsible for paying it. In rare cases, the IRS may levy the gift tax on the recipient if the donor decides not to pay it. Nonetheless, there are several ways the affluent can avoid the gift tax. These include careful estate planning strategies, utilizing the right trust and taking advantage of the exclusions for giving money to students. These can prove especially handy if your parents are investing in a 529 college savings plan for you.
How Much Is the Gift Tax?
In the event your parents do owe out-of-pocket gift taxes to the IRS, the rate usually stretches from 18% to 40%. However, the IRS sets some specific rules and allows some exceptions when it comes to handling gift taxes. Your parents can learn more about how this impacts their specific situation by reviewing the instructions on IRS Form 709.
How to Avoid the Gift Tax?
If your parents are investing in a 529 plan to fund your college education, they can take advantage of gift tax exclusions unique to these savings vehicles.
As long as they make a special election, your parents can make a lump sum contribution toward a 529 plan up to five times the annual gift tax exclusion while avoiding gift tax. That limit is $95,000 ($190,000 if married filing jointly) for tax year 2025. Known as “super funding,” making five years’ worth of 529 plan contributions in one year means any additional contributions made to the same plan during that stretch will potentially be taxable.
So, let’s say you’re a single parent who contributes a lump sum of $95,000 to your child’s 529 plan in 2025. Over the next five years, the IRS will essentially spread out the lump sum contribution for gift tax purposes. Therefore, you avoid exceeding the annual gift tax exclusion and lowering your lifetime exemption limit. Again, the only condition is that you cannot make any more contributions to the plan for the next five years.
However, if you were to die during that five-year period, the IRS would consider the remaining portions of the $95,000 sum as part of your federal gross estate for tax purposes.
For example, say a woman decides to superfund her daughter’s 529 plan in 2025 but but dies during year two. The first two years’ worth of contributions ($19,000 x 2 = $38,000) won’t count toward the woman’s taxable estate. The remaining $57,000 ($95,000 – $38,000 = $57,000) will, however. In addition, some states have their own particular estate tax rules.
If a parent or parents need help taking advantage of the gift tax exemptions for 529 plans, a financial advisor or certified public accountant (CPA) can potentially help.
How to Use Gifts to Minimize Estate Taxes
Gifting can be an effective way to reduce the size of a taxable estate over time. By transferring assets while alive, individuals can lower the total value of their estate that may be subject to federal estate taxes at death. The IRS allows each person to give up to the annual exclusion amount per recipient without affecting the lifetime exemption. Making consistent annual gifts to family members or other beneficiaries can gradually move wealth out of an estate without triggering a tax liability.
In addition to annual gifts, certain transfers are not counted toward the gift or estate tax limits. Payments made directly to educational institutions for tuition or to medical providers for qualified medical expenses are exempt from gift tax, regardless of amount. These payments can reduce an estate’s value while supporting loved ones in meaningful ways.
Larger gifts above the annual exclusion can also be useful when coordinated with long-term estate strategies. These gifts reduce the lifetime exemption amount but can remove appreciating assets from the estate, limiting future tax exposure on growth. For individuals with significant wealth, tools such as irrevocable trusts, spousal lifetime access trusts (SLATs), and 529 plan contributions can further support tax-efficient wealth transfer.
Because the federal lifetime exemption is scheduled to decrease after 2025 unless new legislation extends current limits, those considering substantial gifts may wish to review timing and structure carefully. Working with a qualified financial advisor or estate planning attorney can help align gifting strategies with current law and long-term family objectives.
Bottom Line
You most likely won’t owe any gift taxes on a gift your parents make to you. Depending on the amount, your parents may need to file a gift tax return. If they give you or any other individual more than $38,000 in 2025 ($19,000 per parent), they will need to file some paperwork. They generally won’t pay any out-of-pocket gift tax unless the gifts for the year exceed their lifetime gift tax exemption. For the tax year 2025, that factor stands at a sizable $13.99 million ($27.98 million for married couples filing jointly). But if they do owe some gift tax, they could owe up to 40%. in 2026, the lifetime exemption will go up to $15 million.
Estate Planning Tips
- Estate planning can be a complicated financial terrain to navigate. However, a financial advisor can guide you and your parents through it with ease. 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.
- While you most likely won’t owe tax on gifts from your parents, your parents may face a tax bill. However, they should explore different estate planning strategies to avoid gift and estate taxes or minimize the hit.
- If you received a gift from a parent who recently passed away, you should become familiar with the inheritance tax you may face.
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