Gift tax, how it works and the limits

Mark Steber

Chief Tax Officer

Published on: June 05, 2025

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The federal gift tax applies to gifts of property or money while the donor is living. The federal estate tax applies to property conveyed to others (except for a spouse) after a person’s death. Both the gift tax and the estate tax apply to individuals giving the asset (the donor).

Throughout our lives, we often give family and friends gifts. But sending a $100 gift card for a birthday is quite different than gifting someone a house or handing over a large sum. These larger gifts may mean that the gift giver (donor) may have to pay taxes. The IRS becomes involved when a gift donor goes over certain thresholds, called the annual gift tax exclusion and the lifetime gift and estate tax exemption. Read on to find out about what these limits are, how to report the gift tax as a donor , and more.

What is the gift tax? Federal gift tax explained.

We will delve into an overview below, but because every situation is different, you’ll want to speak with your Tax Pro, and likely an attorney, before considering the best next steps for giving very large gifts.

Broadly speaking, the gift tax is a federal tax on transfers of money or property to others who are giving you nothing—or little—in return.

By “little,” the IRS specifically means less than fair-market value. For example, if you spent $20,000 on a new car, and then sold it to a friend for $500, the IRS would probably view that sale as a gift. So it’s always good to check in with experts along the way. We will go into more detail on what taxable and non-taxable gifts are below.

What gifts do you need to report?

Gifts greater than the annual gift tax and lifetime gift and estate tax exclusion (more on those below), are likely to be taxable events:

Direct gifts. You transfer cash, a car, or other forms of property directly to another person.
Indirect gifts. You make a gift on behalf of another person. A good example of this is paying off someone’s credit card balance for them.
Complete gifts. You give up all rights to a property after it is transferred to another person.
Incomplete gifts. The opposite of a complete gift. It is a gift where you still keep authority over the gift after you’ve transferred it to someone else. A good example of this is “revocable trust,” because the trust is still under the donor’s control.
Reversionary interest. You transfer property to another person only for a limited time. A good example of this is a trust that has a cut-off date, where the trust is set to transfer back to you, the donor. In this case, the value of the gift is less than the value of the property, since it’s temporary.
Net gifts. This is the only case where the recipient—not the donor—will pay a gift tax when it’s time to file.

What isn’t considered a gift and therefore not taxed?

As alluded to above, the IRS will not tax you on certain gifts you make. The rules are centered around the context of the gift-giving and the underlying “why” of the gift-giving. We outline some examples below, but again, always reach out to a Tax Pro and in some cases, attorneys, to make sure that you’re proceeding properly.

What is considered a taxable gift versus a non-taxable gift?

Taxable gift	Non-taxable gift
Cash	Educational expenses for someone else paid directly to an education institution
Stocks and bonds	Medical expenses for someone else paid directly to a medical institution
Real estate and vehicles	Gifts to a spouse
Art	Gifts and donations to political organizations

Qualified transfers. You’re not taxed on payments you make directly to a qualified academic institution or medical provider. For example, grandparents paying for a grandchild's college tuition and fees.
Support payments. You may not need to pay tax on legal obligations for children or other dependents. A prime example of this would be child support to the guardian of your child or dependent.
Divorce settlement payments. You’re not taxed on alimony you pay under a signed agreement
Donations to political organizations. The IRS views this as advocating, or voting, for a public service, and won’t tax you. The contribution is also not deductible from income.
Business transfers. The IRS considers most of these as another form of compensation for work and are therefore not considered gifts.
Gifts between spouses. You won’t pay a gift tax on money passing between you and your spouse, as long as you’re U.S. citizens. If one of you isn’t a U.S. citizen, then there is a limit on the tax-exempt transfer.

What is the annual gift tax exclusion?

The maximum amount you can give to any one person in 2025 before having to file a gift tax return is $19,000. You can give multiple individuals up to this amount such as $19,000 to each of 4 children. Formally referred to as the annual gift tax exclusion, if you give away more than this amount to an individual in a year, you’ll need to file a gift tax return for that tax year, but you may not pay any gift tax until you reach the lifetime gift tax exclusion amount discussed next. The IRS adjusts the gift tax exclusion limit yearly for inflation.

What is the lifetime gift tax exemption?

There is an annual gift tax exclusion amount and a lifetime gift tax exclusion amount.

The lifetime gift tax exemption is the amount of money or assets you can give away over your lifetime without paying the federal gift tax.

For 2025, the lifetime gift tax exemption is $13.99 million. This means you can give up to that amount in gifts over your lifetime without paying gift tax. For married couples, both spouses get the $13.99 million exemption. This means that if you are married, you and your spouse could give away a combined total of $27.98 million before paying the gift tax. It’s crucial to check with your Tax Pro and attorneys on what the limit is for every year, because it changes.

How do I calculate the gift tax?

How do I report gifts?

If you made a taxable gift contribution this year (again, one that exceeds $19,000 for 2025), you will file IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, in addition to your annual individual tax return.

And even if you haven’t exceeded your lifetime limit in gifts and won’t have to pay taxes on this year’s gifts, you still must file to report the excess gift to the IRS.

Like federal income tax with increasing tax rates as income increases, the gift tax rate depends on the value of the gifts. The higher the value of the gifts, the more you’ll have to pay in a gift tax.

To calculate the gift tax, use the following tax brackets when completing the return. A Tax Pro will be able to best calculate and guide you.

Federal gift tax rates

Taxable amount exceeding annual gift 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	38%
$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%
$1,000,001 or more	40%

The broader tax code and various limits change every year. A Jackson Hewitt Tax Pro can answer your tax questions and concerns if you’ve made gifts this year or are looking to make one in the future. Find one near you today.

Frequently asked questions

The giver (donor) of the gift is generally responsible for paying the gift tax. Under special arrangements, the recipient of the gift may pay the tax instead. A Tax Pro can help advise you. It’s important to note that the earnings from investing money, or selling assets received after the gift is accepted, are taxable to the recipient of the gift.

States vary in whether and how they tax transfers of property. A gift tax is imposed on property transferred while the donor is still alive. Estate taxes and inheritance taxes are imposed on the transfers of property after the decedent’s death. Many states have an estate or inheritance tax but only Connecticut has a state gift tax.

Your parents can each give you up to $19,000 in 2025 without triggering a gift tax return. However, any amount that exceeds that will need to be reported to the IRS by your parents and will count against their lifetime limit. Keep in mind that the annual gift limit of $19,000 is per person, not a joint amount.

If you’re still a dependent of your parents and they’re paying for your higher education--room and board for example--this isn’t considered a gift. A transfer of $100,000 to you directly is considered a gift and may be taxable to the giver.

Gift and estate tax returns are more likely to be audited by the IRS when there are complex assets, unusual deductions, taxes are owed, and the size of a transaction or the overall estate is relatively large.

If an atypical gift occurs, perhaps securities that are not traded on the market such as private business or a government-related gift, then a qualified appraisal of that gift may be required by the IRS to determine the gift’s value. Or, if the IRS suspects the appraisal of the gift is an error, that could trigger an audit.

There are a few other less common reasons a gift tax return could be audited. The best way to prevent this is to file with a Tax Pro or have one do a recheck of your filed tax return.

You can do that legally, yes, but be mindful of local, state and federal laws surrounding gift taxes and real estate. If you gift your $500,000 home for $1, the fair-market value of the asset will be $499,999 and the same amount is part of the annual and lifetime gift tax exclusions ($19,000 and $13.99 million for 2025) for you.

Alternatively, if you leave your home to an individual in your will, the value of the home is the fair-market value on the date of death and that becomes the cost basis upon which any gain on the home is calculated upon sale. An inheritance is not considered a gift and an inheritance is not taxable to the beneficiary upon receipt. Be sure and speak with a local, qualified estate or property lawyer, as well as with your Tax Pro, beforehand to avoid legal and financial pitfalls.

About the Author

Mark Steber is Senior Vice President and Chief Tax Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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