Are Gift Taxes Progressive? Tax Rates and Rules
Explore the gift tax's progressive rate structure, which applies to cumulative lifetime transfers, not individual gifts, and how exemptions affect what is owed.
When an individual gives a substantial amount of money or property to another person without receiving something of at least equal value in return, a federal tax may be imposed. This tax, known as the gift tax, is paid by the giver, not the recipient. It is designed to prevent individuals from avoiding estate taxes by transferring their wealth before death.
Understanding Progressive Taxation
A progressive tax is a system where the tax rate increases as the taxable amount increases. The most common example in the United States is the federal income tax system. Under this structure, income is divided into segments known as tax brackets, and each successive bracket is taxed at a higher rate.
This approach contrasts with a flat tax, where a single tax rate is applied to all income levels. Another type of system is a regressive tax, where the tax rate effectively decreases as the amount subject to taxation increases, such as with sales taxes.
The core idea behind progressive taxation is to levy taxes based on the taxpayer’s ability to pay. As a person’s financial resources grow, they are expected to contribute a larger percentage of those resources in taxes.
The Federal Gift Tax Rate Structure
The federal gift tax is structured as a progressive tax, meaning the rate climbs as the total value of taxable gifts increases. The tax is not calculated on a gift-by-gift basis but on the cumulative total of all taxable gifts a person makes over their lifetime.
The Internal Revenue Service (IRS) provides a unified tax rate schedule for both lifetime gifts and transfers at death. The rates begin at 18% for the first $10,000 in cumulative taxable gifts and progressively increase. For example, cumulative gifts between $150,001 and $250,000 face a tax rate of 32%, while gifts between $750,001 and $1,000,000 are taxed at 39%. The top federal gift tax rate is 40%, which applies to cumulative taxable gifts that exceed $1,000,000.
The tax is unified with the estate tax, meaning the same progressive rates apply to the combined total of taxable lifetime gifts and the value of the estate. This prevents individuals from using lifetime gifts to circumvent the progressive nature of the estate tax.
Key Exclusions and Exemptions
While the gift tax rates are progressive, several provisions shield a significant amount of wealth from being taxed. The most frequently used tool is the annual gift tax exclusion. For 2025, an individual can give up to $19,000 to any number of people per year without any gift tax consequences or filing requirements. This exclusion amount is indexed for inflation.
Married couples can use “gift splitting” to combine their individual annual exclusions for a single recipient. This allows a married couple to give up to $38,000 to one person in 2025 without making a taxable gift. To take advantage of gift splitting for amounts over the individual annual exclusion, the couple must file a federal gift tax return, Form 709, to signify that both spouses consent.
Beyond the annual exclusion is the lifetime gift and estate tax exemption, which is unified into a single credit. For 2025, this exemption is $13.99 million per person. When a gift exceeds the annual exclusion, the excess is a taxable gift, but tax is not immediately due. Instead, the taxable amount is subtracted from the donor’s lifetime exemption, and out-of-pocket gift tax is only paid after this entire amount has been used.
Under current law, this high exemption amount is scheduled to revert to approximately $7 million (adjusted for inflation) at the beginning of 2026.
Calculating the Gift Tax
To determine if a gift tax is owed, first calculate the total value of gifts made to a single recipient in a year and subtract the annual exclusion. For example, if an individual gives $50,000 to their child in 2025, the first $19,000 is covered by the annual exclusion.
The remaining $31,000 is the taxable gift for that year. This amount must be reported to the IRS on Form 709, the U.S. Gift (and Generation-Skipping Transfer) Tax Return.
The filing of this return reduces the donor’s available lifetime exemption. If the donor had the full $13.99 million exemption available at the start of the year, their remaining exemption would be reduced to $13,959,000. This process continues with each subsequent taxable gift.