What Is a Gift Tax?
The gift tax is a federal tax applied to an individual giving anything of value to another person. For something to be considered a gift, the receiving party cannot pay the giver full value for the gift, though they may pay an amount less than its full value.
The donor of the gift is required to report the gift on their tax return and pay the gift tax. Normally, the recipient doesn't have to report the gift. Under special circumstances, the recipient may pay the gift tax.
- The gift tax is a federal tax levied on a taxpayer who gives money or other items of value, such as property, to someone else.
- The gift tax ranges from 18% to 40%, depending on the size of the gift.
- For 2021, the annual gift exclusion is $15,000 per recipient; the lifetime exemption is $11.7 million for a single donor.
- Gifts made to spouses who are U.S. citizens, to political organizations for use by the organization, and for medical and tuition-related expenses on behalf of the recipient are excluded from the gift tax, along with gifts that are valued at less than the annual exclusion amount.
- Gift splitting and gifts in trust are two strategies to avoid incurring the gift tax.
How a Gift Tax Works
The federal gift tax was created to prevent taxpayers from giving money and items of value to others to avoid paying income taxes. To prevent undue hardship to the recipient and oblige givers to honor their tax liability, the gift tax is applied to the donor, as the IRS dubs the giver.
The gift tax can be hefty: The rates range from 18% to 40% on a sliding scale, based on how big the taxable gift is. However, there are a lot of exceptions to the gift tax.
The following are generally not subject to gift tax:
- Gifts to the donor’s spouse. An unlimited amount can be gifted tax-free if the spouse is a U.S. citizen. If the spouse is not a U.S. citizen, tax-free gifts are limited to an annually adjusted value ($159,000 in 2021)
- Gifts to a political organization for its use
- Medical and educational expenses—payments made by a donor to a person or an organization, such as a college, doctor, or hospital
- Gifts to a charitable organization
- Gifts that are valued at less than the annual gift-tax exclusion rate for that year (see below)
Gift Tax Exclusions
The gift tax is only triggered on gifts above a certain amount. Sums below that amount—whether actual cash or the value of the gift—are what's called "excluded" from the gift tax. There are two types of exclusions: annual and lifetime.
In 2021, the annual exclusion is $15,000 per recipient. This means that an individual is able to give another individual $15,000 or less per year without incurring a gift tax. The annual gift tax exclusion is per recipient, not per donor. So one person could bestow several gifts worth up to $15,000 to different people, without triggering the gift tax.
The lifetime exclusion is the total sum an individual can give over the course of their life. Adjusted annually for inflation, this exclusion is $11,700,000 in 2021. That means the donor can gift up to this amount before the gift tax is applied. Annual limits still apply; the lifetime exemption applies to amounts over and above annual exclusions.
If your gift to any single recipient exceeds the annual maximum ($15,000 in 2021), you won't necessarily owe gift tax, because it still may be under the lifetime gift tax exclusion amount. But you will have to report the gift on your tax return, by filing IRS Form 709.
Gift Tax Strategies
There are strategies for avoiding or minimizing the gift tax.
Being married allows you to double your gifts. Remember, the annual exclusion applies to the amount of gift an individual can give a recipient. That means that, even if they file a joint tax return, spouses can each give $15,000 to the same recipient—effectively raising that gift to $30,000 per year without triggering the gift tax.
This strategy is known as “gift splitting” and enables wealthy couples to give substantial annual gifts to children, grandchildren, and others. This gift can be on top of, say, tuition paid directly to a grandchild’s school or college—which is exempted outright from the gift tax.
Gift in Trust
Donors can give gifts in excess of the annual exclusion without paying taxes by establishing a special type of trust—the Crummey trust is the usual arrangement—to receive and distribute the funds.
The gift tax exclusion usually doesn't apply to money distributed by trusts. But a Crummey trust allows the beneficiary to withdraw the assets within a limited time period—say, 90 days or six months. This gives the beneficiary what the IRS calls a "present interest" in the trust—and this sort of distribution can qualify as a non-taxable gift. The recipient can only take out a sum equal to the gift given to the trust, of course.
Under special circumstances, like 529 college savings plan contributions, you can gift more than the annual $15,000 without reducing your lifetime gift-tax exemption. Basically, you report this single large gift as being spread over five years on your tax return, filing the form each year. The only catch: You can’t make any additional gifts to the same recipient during this period. If you do, it will be applied to your $11.7 million lifetime exclusion.
Gift Tax Return
The federal gift tax return is known as Form 709. It must be filed under certain conditions by the donor of a gift. Gift recipients normally don't have to report gifts—though they may pay the gift tax, or a percentage of it, on the giver's behalf (in which case, they would have to file the form).
Individuals who give a gift that exceeds the annual or lifetime exempt gift limit established by the IRS must fill out the form and include it when filing their annual income tax returns.
Form 709 includes calculations for how much gift tax, if any, is owed. But filing Form 709 doesn't necessarily mean you pay the gift tax. If you've given a gift that exceeds the annual exclusion maximum ($15,000 in 2021), but is still under the lifetime maximum ($11.7 million in 2021), you won't trigger the gift tax. But you still must report the gift.
Examples of the Gift Tax
- Taxpayer A gives $20,000 to each of five recipients in 2020. Because the annual exclusion limit is $15,000 per person, $25,000 of the total amount given is not excluded. However, the non-excluded amount reduces the lifetime exemption amount. So, after making these gifts, Taxpayer A has $11,555,000 remaining of the exemption to give before paying gift taxes.
- A grandmother who wants to encourage her granddaughter's going to medical school pays the school $20,000 for a year's tuition. That same year, she also directly gives the girl $15,000 for books, supplies, and equipment. Neither payment is reportable for gift tax purposes—the tuition is excluded outright, and the $15,000 is the maximum allowed under the annual exclusion. If Grandma had sent the future physician $30,000 and the girl had paid the school, the grandmother would have made a reportable (but maybe not taxable) gift in the amount of $15,000 ($30,000 less the annual exclusion of $15,000) which would have reduced her $11.7 million lifetime exclusion by $15,000.
Gift Tax FAQs
How Much Is the Gift Tax?
The gift tax is applied on a sliding scale, depending on the size of the gift. It only kicks in on gifts above and beyond a certain threshold established by the IRS. First, a flat amount is accessed; additional tax is then levied at a rate that ranges from 18% to 40%.
How Much Can I Gift Someone Tax-Free?
You can give someone (or multiple someones) up to $15,000 each year without triggering the gift tax. Over your lifetime, you can give gifts totaling $11,700,000.
Does the Receiver of a Gift Pay Tax?
The person receiving a gift usually is not required to pay gift tax. The recipient can opt to do so, though, especially if the amount would put the donor over their lifetime gift-tax exclusion.
How Much Can I Gift My Child?
You can gift your child or grandchild the same amount you can gift other relatives or friends without incurring the gift tax, namely:
- $15,000 annually per child
- $11.7 million over the course of your entire lifetime
These figures are for 2021. The IRS regularly adjusts these maximums for inflation.
Since the $15,000 threshold applies to one donor, a married couple can each give that amount to the same child, resulting in an annual $30,000 gift.
The Bottom Line
The gift tax is a federal levy that applies when you give to another individual or individuals, and without charge, a sum of cash or assets—either tangible or intangible—that have intrinsic worth. It is imposed on the donor rather than the receiver.
However, the gift tax has been devised in such a way so that very few people end up actually paying it. There are numerous types of gifts that are exempted, including anything to a spouse. In addition, you can give a seven-figure sum over the course of your life before the gift tax is triggered—and even then, it applies to the amount above that threshold.