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Gift Tax: (Ch. 12 of the Internal Revenue Code (the “Code”)* ; sections 2501, et seq.)

  1. Definition and Scope of the Gift Tax:

    • The gift tax is a federal tax on the transfer of money or property to another person without receiving full value in return. It applies to cash, real estate, stocks, and other assets, and to indirect or even unintentional transfer.
    • The donor (giver) is responsible for paying the tax, not the recipient.
    • The gift tax is meant to backstop the estate tax and to prevent erosion of the estate tax base. It has failed to achieve that goal, as it is riddled with exceptions and independently enforced. This may arise from the fact that the gift and estate taxes do not raise much revenue (about ¾ of 1% in 2023, as opposed to 1.6% in 1950).

  1. Annual Gift Tax Exclusion:

    • For 2025, the annual gift tax exclusion is $19,000 per recipient (up from $18,000 in 2024). 26 U.S.C. § 2503(b). A donor’s direct payments of tuition to an accredited educational institution, and medical expenses to a health care provider, do not count towards the total value of the annual exclusion. 26 U.S.C. § 2503(e).
    • Married couples can combine their exclusions to give up to $38,000 per recipient annually without triggering reporting requirements. One spouse can make the entire gift, provided the non-donor spouse consents to “split gift” treatment on a gift tax return. 26 U.S.C. § 2513.
    • Gifts exceeding this limit must be reported on IRS Form 709 but do not immediately incur taxes unless lifetime limits are exceeded (which they rarely are). IRS Form 709.[1] IRS Form 709 Instructions.[2]

  1. Lifetime Gift and Estate Tax Exemption:

    • The lifetime exemption for 2025 is $13.99 million per individual (double for married couples), which also applies to estate taxes. 26 U.S.C. § 2010.
    • Gifts exceeding the annual exclusion reduce this lifetime exemption before any taxes are owed.
    • This exemption was scheduled to revert to approximately half its current level in 2026, until the new One Big Beautiful Bill Act (H.R.1.), signed into law by President Trump on July 4, 2025. H.R.1. “permanently increases the estate and lifetime gift tax exemption to an inflation-indexed $15 million for single filers and $30 million for joint filers beginning in 2026.”[3] This change permanently extends the historically high exemption amount set by the Tax Cuts and Jobs Act of 2017 (TCJA).[4]

  1. Tax Rates:

    • The gift tax rate is 40% for gifts exceeding the lifetime exemption limit. 26 U.S.C. § 2502. Virtually no one accidentally pays gift tax; lifetime giving is usually structured within the exemption.

  1. Deductions from Gift Tax:

    • Deductions from gift tax are allowed in unlimited amount for:
      1. Gifts to spouses, both outright and in special marital qualified trusts (see 26 U.S.C. § 2523(a), (f)) known as “QTIP trusts.”
      2. Charitable deductions to qualified domestic charities (see 26 U.S.C. § 2522) of which more discussion will follow.

  1. A note on gift tax reporting:

    • As stated above, gifts exceeding the annual exclusion must be reported using IRS Form 709, even if no tax is due, because of the lifetime exemption.
    • Adequate disclosure on Form 709 is critical; failure to disclose properly can result in indefinite IRS review periods, while careful reporting can limit the IRS’ ability to audit returns to a 3-year period. 26 C.F.R. § 301.6501(c)-1(f)(2).
    • New York does not have a gift tax, but all gifts exceeding the federal annual exclusion made within 3 years of a decedent’s death are brought back into the decedent’s New York taxable estate. Y. Tax Law § 954(a)(3).

 

 

[1] United States Gift (and Generation-Skipping Transfer) Tax Return, IRS Form 709 (Rev. 2024), https://www.irs.gov/pub/irs-pdf/f709.pdf (last visited May 29, 2025).

[2] Instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, Internal Revenue Serv., https://www.irs.gov/instructions/i709 (last visited May 29, 2025).

[3] Garrett Watson, Huaqun Li, Erica York, et al. “One Big Beautiful Bill Act” Tax Policies: Details and Analysis (July 4, 2025), https://taxfoundation.org/research/all/federal/big-beautiful-bill-senate-gop-tax-plan/.

[4] Stinson LLP, One Big Beautiful Bill Explained (July 8, 2025), https://www.stinson.com/newsroom-publications-one-big-beautiful-bill-explained.

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