A Brief Guide to the IRS Gift Tax
Giving gifts—whether to family, friends, or others—is a generous way to share your wealth, but it can also come with tax implications if you’re not careful. The IRS sets annual and lifetime limits on how much you can give without triggering gift taxes. Understanding the US gift tax limit is key to avoiding unexpected liabilities.
Join our Raleigh small business CPAs as we break down how the gift tax limit works, who’s responsible for paying it, and how strategic planning can help you stay within the rules while making the most of your giving.
Table of Contents
Understanding Gift Tax
What is gift tax? Gift tax is a federal income tax imposed by the Internal Revenue Service on the transfer of money or property from one individual to another without receiving something of equal value in return. In other words, if you give someone a gift—whether it's cash, real estate, or other assets—that exceeds a certain threshold, you may be required to report it and potentially pay taxes on it.
Who Pays Gift Tax?
The tax typically applies to the gift giver, not the gift recipient. However, many gifts fall under exclusions or exemptions, which means most people never actually owe gift tax. Still, it’s important to understand when these rules apply, especially if you're planning to give substantial gifts or transfer wealth over time.
What is the Gift Tax Limit?
The gift tax limit refers to the maximum amount you can give to someone in a calendar year without having to report it to the IRS or pay gift tax. For 2025, the annual gift tax exclusion is $18,000 per recipient. This means you can give up to $18,000 to as many people as you’d like each year without it counting against your lifetime gift tax exclusion or requiring you to file a federal tax return on gifts.
What is the Gift Tax Rate?
The federal gift tax rate ranges from 18% to 40%, depending on the total value of the gifts you've given above your lifetime exemption limit. Most taxpayers never reach this point, since the lifetime exemption is quite high—$13.61 million per individual in 2025. However, if your total taxable gifts exceed that amount, the excess could be taxed.
Gifts That Are Not Taxable
Not all gifts are considered taxable, including:
- Donations to charities approved by the IRS,
- A gift to your spouse, assuming he or she is a U.S. citizen;
- A gift to pay for tuition, assuming the money covers only tuition (not room and board, books, or supplies) and is paid directly to the institution;
- Donating to a political organization;
- Gifts to cover medical expenses, if the gift is paid directly to the medical facility (Such as sending a payment directly to a hospital to cover a bill);
A tax free gift to spouse may include a birthday, holiday, or anniversary present such as a tangible gift or a vacation. Such a tax free gift to your spouse is tax exempt. Thus, there is no spouse gift tax you need to worry about.
Not only do you not need to report these to the IRS to apply toward the gift tax, any gifts to a qualifying charity can be deducted from the total amount you gifted.
The Lifetime Gift Tax Exemption
The lifetime gift tax exemption is the total amount you can give over your lifetime without owing federal gift tax. In 2025, this exemption is $13.61 million per individual, adjusted periodically for inflation. This exemption works alongside the annual gift exclusion, allowing you to gift large amounts tax-free over time—as long as you stay within the total limit.
For example, if you use $3 million of your exemption for lifetime gifts, only $10.61 million (based on the 2025 limit) would remain available to shelter your assets from federal estate tax when you pass away. That’s why coordinating your gifting and inheritance strategies is key to effective long-term financial planning.
Common Gifts That May Require Gift Tax Reporting
Not all gifts qualify for exclusions. The following types of gifts are subject to gift tax rules and may require you to file Form 709 if they exceed the annual exclusion:
- Cash gifts over the annual exclusion amount to a single recipient
- Gifting property (like real estate, vehicles, or artwork) without receiving equal value in return
- Paying off someone else’s debt, such as credit card balances or loans
- Transferring ownership of assets like stocks or bonds
- Making large gifts to a non-citizen spouse (limits are lower than for U.S. citizen spouses)
- Forgiving a loan you previously issued to a friend or family member
Types of Tax Free Gifts
The following types of gifts are generally not subject to gift tax and do not count against your annual or lifetime exemption:
- Tuition payments made directly to an educational institution on someone’s behalf
- Medical expenses paid directly to a medical provider or insurance company
- Gift to spouse is tax free so long as they are a U.S. citizen
- Charitable donations made to qualifying nonprofit organizations
- Gifts to political organizations for their use
Common Gift Tax Mistakes to Avoid
Even well-intentioned gifts can lead to complications if you’re not aware of the rules. Here are some common gift tax mistakes to watch out for:
- Failing to file Form 709 when a gift exceeds the annual exclusion
- Assuming married couples can file a joint gift tax return—each spouse must file separately if they’ve made taxable gifts
- Misunderstanding gift splitting rules, such as not properly documenting shared gifts between spouses
- Overlooking non-cash gifts, like property or investments, that still count toward the gift tax limit
- Not keeping accurate records of gifts given and reported over time
- Ignoring gifts to non-citizen spouses, which have lower exemption limits than those for U.S. citizen spouses
- Forgetting to track cumulative gifts that reduce your lifetime exemption
How to File a Gift Tax Return
If you've made a gift of more than $18,000 to the same recipient within one year, you have made a taxable gift. You will have to fill out a Form 709: U.S. Gift Tax Return come tax season.
Gift Tax Return Deadline
This return is due along with your tax return and any other IRS forms, on the filing deadline of the calendar year after you make your gift.
Filing Separately as Spouses
Spouses are not allowed to file a joint gift tax return. They must each fill out their own forms if they have made a gift of over $18,000. Married couples can opt to use gift "splitting," where they combine their gift tax exclusions to give a gift that exceeds the individual limit.
Why Work With a CPA on Gift Tax Planning?
Gift tax rules can be complex, especially when you’re dealing with large gifts, long-term wealth transfers, or navigating both federal and state-level considerations. That’s why an CPA can provide valuable guidance.
A tax professional can help you:
- Understand how the annual and lifetime exclusions apply to your specific situation
- Accurately prepare and file the IRS Gift Tax Form 709 when required
- Strategically plan gifts to minimize tax liability and preserve your estate
- Document gifts properly to avoid issues during audits or estate administration
- Coordinate your gift strategy with estate planning goals, especially if you're transferring significant assets over time
Contact Our Raleigh CPA for Tax Compliance Guidance
Working with an local, small business CPA year-round can help you navigate tax rules with confidence. At C.E. Thorn, PLLC, CPA, our tax planning professionals help small business owners in Raleigh and the surrounding areas understand and optimize their gift tax planning to stay compliant and minimize tax impact.
To learn more about our small business bookkeeping services, call us at 919-420-0092 or fill out the form below.
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