Understanding the Gift Tax: How it Works and How to Use it Wisely

When we give money or assets to loved ones, most people do not think about taxes while they are doing it.  After all, giving is supposed to be easy and generous, right? Unfortunately, the IRS pays close attention to large gifts. Failing to understand the gift tax laws could lead to unpleasant surprises down the road. But when done correctly, the gift tax rules and laws can be a very beneficial tool for transferring wealth and estate planning. In this post, we’ll discuss what the gift tax is, how it works, current limits, exemptions, and strategies to utilize and avoid paying more—while still sharing wealth as you wish to do.

What Is the Gift Tax?

The gift tax is a federal tax that applies when one person gives money or property to another without receiving something of equal value in return. It can apply to many categories such as cash, automobiles, property, land, stocks, and possibly even forgiveness of a debt owed to you. The good news: many people will never pay gift tax—thanks to generous exclusions and exemptions built into the tax system.

Annual Gift Tax Exclusion

Each year, the IRS allows you to give a certain amount of money or other asset to another person without triggering the gift tax. It is called the annual gift tax exclusion.

As of 2025, the annual exclusion is $19,000 per recipient that receives a gift from you.

That means you can give up to $19,000 to as many people as you want, every year, and it won’t count toward your lifetime exemption or trigger any tax liabilities.

Example: You give your child $17,000 for a down payment on their home. That gift falls below the $19,000 limit, so no tax return is required.  In addition, it doesn’t reduce your lifetime gift or estate exemption.

For Married Couples

Married couples can combine their exclusions in a powerful way and give up to $38,000 per recipient annually, as long as both spouses agree to “split” the gift. This is extremely helpful while trying to reduce their taxable estate over an extended period of time.

Lifetime Gift and Estate Tax Exemption

In the event you give more than the annual exclusion to someone in a single year, it doesn’t necessarily mean you owe tax. However, the excess amount does count against your lifetime gift and estate tax exemption.

As of 2025, the lifetime exemption is $13.99 million per person.

This means you can give away up to $13.99 million in taxable gifts over your lifetime without paying or a gift tax. With the passage of the OBBA in July 2025, this number will increase to $15 million in 2026 and be indexed in future years for inflation. However, once this level has been exceeded, you’ll begin to owe gift or estate tax at rates up to 40%.  So, it is important to keep track of all gifts or debts forgiven. If you go over the annual exclusion you may need to file Form 709 with the IRS.

Important note: It is always advisable to keep up with tax code changes and Gift Tax exclusion limits as they can and do change.  It is always advisable to speak to a CPA or tax professional to ensure you are maximizing your gifting strategy.