You might not think twice about giving money or property to your children, grandchildren, or other loved ones. In many cases, these gifts are made out of generosity or to help someone get ahead.
But if the value of that gift crosses a certain threshold, the IRS might take an interest. That is where the federal gift tax comes into play.
Before you start writing large checks or transferring assets, it is a good idea to understand how the federal gift tax works. The rules are more flexible than many people assume, but there are still limits you need to know.
What Is the Federal Gift Tax?
The federal gift tax is a tax on the transfer of money or property to another person without receiving something of equal value in return. It applies whether the gift is cash, real estate, stocks, or even something like a car. The person making the gift is usually responsible for reporting it and, in rare cases, paying the tax.
Gift tax laws are designed to prevent individuals from giving away large portions of their estate before death in order to avoid estate taxes. However, not every gift triggers a tax bill. In fact, most gifts fall below the limits set by the IRS and are never taxed at all.
How Much Can You Give Without Paying a Gift Tax?
The IRS allows you to give up to a certain amount each year to as many people as you want without having to file a gift tax return. This is called the annual gift tax exclusion.
For 2025, the annual exclusion is $19,000 per recipient. That means you can give up to $19,000 to each person in a single year without triggering any reporting requirement.
If you are married, you and your spouse can each give $19,000 to the same person, for a combined total of $38,000 per year. This is known as gift splitting. You must file a gift tax return to elect gift splitting, but no tax is owed if you stay within your combined limits.
Gifts that exceed the annual exclusion count against your lifetime gift and estate tax exemption. As of 2025, that lifetime exemption is $13.99 million per person. Any gifts above the annual limit reduce the amount you can pass tax-free through your estate after your death.
What Types of Gifts Are Excluded?
Some transfers are not considered taxable gifts at all, regardless of the amount. These include:
- Tuition payments made directly to an educational institution
- Medical expenses paid directly to a healthcare provider
- Gifts to a spouse who is a U.S. citizen
- Gifts to qualified charities
These gifts are not subject to the annual exclusion limit and do not count against your lifetime exemption. For example, if you pay $30,000 in tuition directly to a university on behalf of your grandchild, that does not use up any of your $19,000 exclusion.
When Do You Have to File a Gift Tax Return?
You must file IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return, if you make a gift to someone that exceeds the annual exclusion. This does not mean you will owe tax. Filing the return simply records the amount of your gift and applies it against your lifetime exemption.
You are also required to file Form 709 if you elect gift splitting with your spouse, even if no gift exceeded the limit individually. Filing helps maintain accurate records of how much of your lifetime exemption you have used.
The deadline to file Form 709 is the same as your federal income tax return (April 15 of the following year). You can request an extension, but it does not extend the time to pay any potential gift tax owed.
What Happens if You Exceed the Lifetime Exemption?
Most people will never reach the $13.99 million lifetime exemption, but it is possible if you are transferring high-value assets over time. Once your total taxable gifts and estate value exceed that limit, any additional amounts will be taxed.
Because the lifetime exemption is unified between gifts and your estate, the more you give during life, the less you can pass tax-free after death. Strategic planning can help you make the most of your exemption and avoid unnecessary taxes.
Need a Phoenix, AZ Estate Planning Lawyer?
Our doors are open if you are ready to work with an attorney to put a plan in place. You can call us at 888-222-1328 to schedule a consultation, and you can use our contact form to send us a message.
In addition to our Phoenix location, we have offices in Scottsdale, Mesa, Chandler, West Valley, Carefree, Tucson, Oro Valley, Prescott, Sedona, and Flagstaff.
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