Can you imagine paying taxes when you give someone a gift? In certain situations, you will have to pay taxes. But you may be able to avoid a gift tax, which exists to restrain people from transferring their wealth unlawfully. The Internal Revenue Service (IRS) oversees gift taxes (among other taxes).
A gift tax applies when a large sum of money or other asset is given as a gift without anything in exchange. The IRS defines a gift as a transfer in which you receive nothing or you receive less than what you give in exchange.
“A lot of gift tax issues come from transactions people do not think of as gifts. I regularly see problems with informal family loans that are forgiven or never repaid, adding a child to a property title without consideration, or selling an asset for less than fair market value. The IRS may treat the amount by which the property’s value exceeds the consideration paid as a gift, even if no one intended it as such. What helps most is documenting the transaction clearly, including a written loan agreement with appropriate interest terms, support for the property’s value, and records showing what consideration was actually exchanged.”
Gifts may also reduce your estate taxes, and your loved ones can enjoy your gift without paying taxes later.
What gifts fall under the gift tax?
Small birthday gifts are usually tax free. However, larger ones may be subject to a gift tax. A gift given in 2024 is taxed when it surpasses $18,000. The IRS determines this amount annually.
These are examples of gifts you may be required to pay taxes on.
Taxed gifts:
- Property
- Cash or checks
- Vehicle
- Loans without interest or other assets
- Certain gifts to a business
- Gifts that can’t be used in the present
“Business owners run into gift tax issues more often than they expect, especially when transferring ownership interests. Bringing a child or employee in as an owner at a discount, forgiving a shareholder loan, or shifting equity without a clear valuation can all be treated as gifts. I usually advise clients to get a defensible valuation and document the transaction terms carefully. That includes updating operating agreements and keeping records that show why the transfer price makes sense, which can make a big difference if the IRS ever reviews it.”
Non-taxed gifts:
- Payment to medical providers
- Payment to educational institutions
- Donations to political organizations
- Gifts to your significant other
- Gifts or donations to certain charities
- Gifts for use in the present
7 strategies to avoid paying gift tax
In 2024, if you plan to give a gift or gifts exceeding the annual limit of $18,000 per person in a year, you’ll have to file a return and report it to the IRS in Form 709, apart from your income tax return. Documenting your gift taxes is a way to know how and when you’ll be taxed when your lifetime exclusion limit exhausts.
The lifetime exclusion limit is the total amount you can transfer without paying federal estate or gift taxes. This includes gifts given during your life and from your estate transferred at death. The lifetime exclusion limit is $13.61 million in 2024. So, whenever you cross your annual exclusion limit, it’ll be reduced from your lifetime limit.
You typically won't owe gift tax until you exceed your lifetime exemption. However, you can use the following strategies to avoid a gift tax. These strategies will keep you from discrediting your lifetime limit and spending time filing federal tax returns.
1. Understand gift tax limits
If you want to give hefty gifts to your loved ones without worrying about paying a gift tax, you should give something that doesn’t exceed the annual credit of $18,000. The good news is that the limit is set per person, and you can pay the same amount to another person in the same year without filing the return.
For example, paying your son $17,000 in a year is tax-free. You may give a diamond necklace worth $18,000 to your daughter and not pay any taxes because you won’t exceed the per-person annual limit set by the IRS. If you give anything exceeding the $18,000 limit to either of them, you might have to pay a tax when you hit your lifetime credit limit, but that’s rare.
2. Use the lifetime gift tax exclusion
The lifetime gift tax exclusion allows you to transfer wealth up to a certain amount during your lifetime without incurring gift tax. In 2024, this exclusion is set at $13.61 million. This means you can give away this amount throughout your life without owing any gift taxes.
How it works
- Gifts exceeding the annual exclusion amount ($18,000 in 2024) are deducted from your lifetime exclusion.
- You won't incur a gift tax until the total value of your lifetime gifts surpasses the lifetime exclusion amount.
Portability between spouses
Any unused portion of a deceased spouse's lifetime exclusion is added to the surviving spouse's exclusion, effectively increasing their limit to reduce the estate tax burden for their heirs
“Portability can be very useful, but it is not automatic, and that is where mistakes often occur. The executor must make a timely portability election, even if no estate tax is owed, or the decedent’s unused exclusion may not be available to the surviving spouse. I also caution clients that portability does not replace more structured planning. It does not provide the same level of control over how assets are ultimately used, and it does not protect future appreciation in the same way a properly designed trust can. For many couples, it works best as a backstop, not the primary strategy.”
Reducing estate tax burden
By strategically using lifetime gifting, you can reduce the value of your taxable estate. This can potentially eliminate estate taxes for your heirs. The remaining estate value after using the lifetime exclusion will be subject to estate tax.
Example
Suppose you want to give a friend a car worth $25,000 this year, but the annual limit doesn't allow you to spend more than $18,000 on a gift when you give it solely. You can still give it to them even if you exceed your annual limit by $7,000. The remaining amount will be deducted from your lifetime shield. So, you won’t have to pay tax until you hit that lifetime limit of $13.61 million (as in 2024).
Key point
Strategic use of lifetime gifting can be a powerful tool to significantly reduce your estate tax burden for your heirs.
3. Spread gifts over multiple years
If you want to escape the gift tax incurred in a year, you can give gifts in parts. You can only give a gift worth $18,000 to a person and can't give them any additional gifts. If you want to exceed this limit without having to pay tax, consider giving it at a different time.
For example, you can give a gift of $25,000 in parts—give $18,000 in one year and the remaining $7,000 in another year to avoid the gift tax.
4. Marital advantages
The IRS gives couples the benefit of doubling their gifting power: Couples can gift twice the amount of the annual exclusion limit. They can also use the gift-splitting method to avoid paying taxes on transferring huge gifts to their loved ones. Gift splitting allows married couples to effectively double their annual gift tax exclusion by treating gifts made to third parties as if each spouse made half the gift. Both spouses must consent to gift splitting.
“Gift splitting often gets treated as a simple checkbox, but it comes with real reporting requirements. I’ve seen couples assume that staying under the annual exclusion means no filing is needed, when in fact a timely filed Form 709 is generally required to make a valid split-gift election. Another issue is inconsistent reporting, where the spouses do not properly coordinate their returns and consents, which can create confusion later. It also is not always the right move if one spouse has significantly less remaining applicable exclusion amount, since split-gift treatment may not fit the couple’s broader transfer-tax and estate-planning goals.”
For instance, if a married couple wants to give $40,000 to their child, they can use gift splitting to treat it as if each spouse gave $20,000.
But you must consider a few things to transfer gifts as a couple:
- A couple giving each other gifts—regardless of the limit—doesn't have to file a gift tax return. That means couples can exchange any amount of gifts without needing to file or pay the tax.
- The IRS has doubled the annual limit for a couple up to $36,000 in 2024 to give gifts to someone else.
- Couples can use gift splitting—giving twice the amount of the set limit by deciding to have an equal bearing of the gift on each other—to one person in a year when the couple files their return jointly. This also means you’ll have to file the tax return for gift splitting even if you don’t exceed the yearly limit.
- You’ll have to file a return if your spouse isn’t a U.S. citizen and when you exceed the $185,000 gifting limit of a year. Thus annual limit for non-U.S. resident spouses is higher than the usual one.
5. Gifting appreciated assets
Do you know how to avoid a gift tax when you transfer your wealth to your loved ones? By transferring appreciated assets to the one you wish to give a gift to. Appreciated assets are the ones that have increased in value over time. When you give those appreciated assets to someone at the fair market value (the asset value upon selling), you don’t have to pay taxes. It’s a good way to avoid capital gains on assets and estate tax on your property upon your death.
For example, you can give stocks worth $30,000 to your brother without paying any taxes, but you’ll have to report it to the IRS because of the crossed limit.
However, it’s important to note that the recipient will generally have a stepped-up basis in the asset, meaning they will pay capital gains tax on any appreciation above the donor's basis when they sell the asset.
“Cost basis is where I see a lot of confusion with gifting strategies. When you gift an appreciated asset during your lifetime, the recipient usually takes your original basis, which can lead to a larger capital gains tax if they sell. That is very different from inheriting the same asset, where the basis is typically stepped up to fair market value at death. I often walk clients through both scenarios because in some cases, holding the asset until death produces a better overall tax outcome than gifting it early.”
6. Direct payments for education
One of the effective ways to avoid tax consequences when paying a large sum of money to someone is to pay for their education. You can only escape the tax filing when you pay the sum straight to the educational institution and not the individual.
For example, you can cover your grandson’s college expenses by giving the amount to the college instead of giving it to your grandson. The amount paid to the college doesn’t count toward a taxable gift. Thus, it doesn't come under filing a gift tax return.
7. Direct payments for medical expenses
In the same way, you can avoid a gift tax when you foot the bill for someone else’s medical expenses by paying the medical institution or insurance company directly. If you pay the person and not the organization, you’ll have to think about the gift tax liability.
For example, if you want to give $20,000 to your son for a medical emergency, transfer it to the medical provider directly. If you transfer it to your son’s account, you may have to pay taxes because the amount exceeds the annual limit. However, transferring it to the provider directly can save you from that.
How much is the gift tax rate?
The IRS charges from 18% to 40% tax when you exceed your lifetime exclusion credit—up to $13.61 million in 2024. Each portion of your gift limit is charged higher than the previous one.
These figures explain how much tax you’ll have to pay when you cross a certain limit.
Value of taxable gifts and tax rates
- Up to $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: 28%
- $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%
- Over $1,000,000: 40%
By now, you know you don’t have to report your non-taxable gifts to the IRS. But you have the option to do so every time you hand over a gift, and that’s a safe idea. At present the IRS doesn't make you report all gifts. If that changes, your heirs will be responsible for the taxes. As mentioned above, a gift to your non-U.S. resident spouse should be reported to the IRS. There are no special tax filing requirements for gifts between spouses in the U.S., regardless of how you plan for the eventual ownership of the asset.
You should also file a return on a gift to a charity when you transfer half of its ownership to the charity and the other half to someone else. In that case, both gifts (to charity and the other person) should be reported to the IRS.
Common gift tax examples
Different gifts have different implications. A gift to your spouse will be treated differently than a gift to your grandchildren. A monetary gift to a medical institution will differ from a check given to your son.
There are some situations where you might end up paying a gift that triggers tax. Here are three examples of real-life scenarios where you could end up paying taxes on gifts:
- Paying $17,000 for your daughter’s vacation is OK for gift tax purposes but if you pay $20,000 for the same, you might have to pay $2,000 in taxes because you cross your yearly limit.
- You can give stocks worth $18,000 to your two sons in a year and not pay the tax. But when you exceed this $18,000 limit with either of them, you might have to pay the tax. The annual exclusion applies to each individual separately.
- A loan to your friend in which you don’t receive any interest becomes a gift and is liable to be taxed if it’s more than the annual gift tax limit.
FAQs
How much is the gift tax?
If you give a gift of more than $18,000 to one person in 2024, depending upon your gift value, you’ll have to pay between 18%–40% tax upon exceeding the lifetime exclusion amount.
Does the receiver of a gift pay tax?
No, only the donor pays the gift tax unless it’s decided otherwise in rare cases.
How is the lifetime gift tax exclusion related to the estate tax exemption?
Both are considered unified credit in which you have the same amount or the non-taxable asset to pay to your loved ones as gifts or inheritances. If you use up one, the other one gets used up too. In short, you have an equal amount to reduce the tax size of your property that you can use for two things—one to give your property as gifts and the other to reduce the tax value of your estate.
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