How Section 2501 Imposes the Federal Gift Tax

The federal gift tax, governed by Section 2501 of the Internal Revenue Code, is a levy on the transfer of property to another person without receiving full value in return. The core principle is that if you give something of value to someone else without getting something of at least equal value back, you may have made a taxable gift. This tax is designed to prevent individuals from avoiding the federal estate tax by giving away assets before death, ensuring significant transfers of wealth are taxed. The law applies to any gift of property made during a calendar year by an individual.

The Scope of Taxable Transfers

The Internal Revenue Code does not explicitly define a “gift.” Instead, the determination hinges on whether a transfer was made for “less than full and adequate consideration in money or money’s worth.” If the value of the property transferred exceeds the value of anything received in return, the difference is considered a gift for tax purposes. The tax applies whether the transfer is direct or indirect and whether the property is real or personal, tangible or intangible.

Direct transfers are the most straightforward type of gift, including cash, stocks, or other financial assets. Gifting tangible property, such as a car, jewelry, or art, also falls into this category. For example, a parent giving a child a down payment for a house is a direct gift. When real estate is transferred to a relative without payment, the property’s fair market value is considered a gift.

Indirect transfers can be less obvious but are equally subject to the gift tax. For instance, paying off someone else’s debt, such as a student loan or a credit card balance, is considered a gift to the debtor. Providing an interest-free or below-market loan is another form of indirect gift. The gift amount is the difference between the interest that should have been charged at the applicable federal rate and the interest that was actually charged. Adding a person’s name to a bank account or property title without their contribution can also be an indirect gift.

Exclusions and Deductions That Reduce Gift Value

The most widely used provision to avoid the gift tax is the annual exclusion. For 2025, an individual can give up to $19,000 to any number of people without having to file a gift tax return. A married couple can combine their exclusions to give up to $38,000 to a single recipient.

Beyond the annual exclusion, there are unlimited exclusions for certain educational and medical expenses. For the educational exclusion to apply, you must make tuition payments directly to a qualifying educational institution; this does not cover costs for books, supplies, or living expenses. The medical exclusion allows for unlimited payments made directly to a medical care provider for qualifying medical expenses, including health insurance premiums.

The tax code also provides for unlimited deductions for gifts to certain recipients. Gifts to a spouse who is a U.S. citizen are not subject to the gift tax due to the unlimited marital deduction. There is also an unlimited charitable deduction for donations made to qualified charitable organizations. These deductions effectively remove these types of transfers from the gift tax system.

Calculating and Reporting the Tax

When a gift’s value exceeds the annual exclusion amount, it does not mean that tax is immediately due. The U.S. tax system has a unified credit against estate and gift taxes, which is a lifetime exemption that can offset taxable gifts. For 2025, this lifetime exemption is $13.99 million per individual, and any taxable gift made during the year is subtracted from this amount.

The gift tax is cumulative, meaning all taxable gifts made in previous years are taken into account when determining the tax on current gifts. This prevents individuals from using lower tax brackets multiple times. The tax is calculated on the total of all lifetime taxable gifts, and then the tax on prior years’ gifts is subtracted. An individual only pays gift tax after their lifetime exemption is fully exhausted.

Any gift that exceeds the annual exclusion must be reported to the IRS on Form 709, the United States Gift Tax Return. This form must be filed to track the use of the lifetime exemption, even if no tax is due for the year. Form 709 is due on April 15 of the year after the gift was made, though an extension to October 15 is possible.