How to Gift Large Sums of Money: Tax Rules

Gifting significant sums of money involves understanding specific tax implications to ensure compliance with federal regulations. These transfers can be subject to gift tax rules designed to prevent the circumvention of estate taxes. Navigating these rules requires awareness of annual limits, lifetime exemptions, and proper reporting procedures.

Understanding Federal Gift Tax

A “gift” for tax purposes is a transfer of money or property to another person where no, or less than full, value is received in return. The responsibility for paying any gift tax falls on the donor, not the recipient. The tax system places specific thresholds on these transfers.

The annual gift tax exclusion allows an individual to give a certain amount to any number of people each year without triggering reporting requirements or reducing their lifetime exemption. For 2025, this annual exclusion amount is $19,000 per recipient. Gifts made below this threshold do not count against the donor’s lifetime exemption.

Any gift exceeding the annual exclusion amount must be reported to the IRS, but it does not necessarily mean gift tax will be owed. Amounts above the annual exclusion begin to reduce the donor’s lifetime gift tax exemption. This lifetime exemption is unified with the estate tax exemption, covering gifts made during life and assets transferred at death.

For 2025, the lifetime gift tax exemption is $13.99 million per individual. This substantial amount allows most individuals to make significant gifts over their lifetime without incurring actual gift tax liability. Gift tax rates, which can range from 18% to 40%, only apply to the cumulative value of gifts that exceed this lifetime exemption.

Married couples have an additional advantage through gift splitting. This provision allows spouses to combine their individual annual exclusions, enabling them to give up to $38,000 to any single recipient in 2025 without using their lifetime exemption or reporting the gift. Even when gift splitting, married couples must file IRS Form 709 to formally elect to split the gift, even if no taxable gift results.

Strategies for Tax-Efficient Gifting

Strategic gifting can minimize or avoid gift tax implications. One approach involves consistently utilizing the annual exclusion amount. Donors can make gifts up to $19,000 per year to multiple individuals without affecting their lifetime exemption or incurring gift tax reporting requirements. This strategy allows for a systematic reduction of a donor’s taxable estate over time.

Certain direct payments are also excluded from gift tax. Direct payments for qualified educational expenses and medical care are not considered taxable gifts. To qualify, tuition payments must be made directly to the educational institution, not to the student. Medical expense payments must be made directly to the healthcare provider.

Gifts made between spouses who are United States citizens qualify for an unlimited marital deduction. A U.S. citizen can gift any amount of money or property to their U.S. citizen spouse without incurring gift tax or using their lifetime exemption. If the spouse is not a U.S. citizen, a higher annual exclusion applies, which is $190,000 for 2025.

Charitable contributions also offer tax advantages. Gifts made to qualified charitable organizations are exempt from gift tax, regardless of the amount. This allows donors to support causes without triggering gift tax liability. Such contributions can also provide income tax deductions for the donor.

For complex gifting scenarios, trusts can serve as vehicles. Certain irrevocable trusts remove assets from the donor’s taxable estate. A “Crummey trust,” for example, allows gifts to the trust to qualify for the annual gift tax exclusion by giving beneficiaries a temporary right to withdraw funds. These structures facilitate tax-efficient transfers, manage assets, and provide for beneficiaries.

Reporting Gifts to the IRS

When a gift exceeds the annual exclusion amount, the donor is required to report it to the IRS using Form 709, Gift Tax Return. This form is necessary even if no gift tax is owed, as it tracks the cumulative amount of gifts that reduce the lifetime exemption. Circumstances requiring Form 709 include gifts over the annual exclusion, gifts of future interests, or when spouses elect to split gifts.

To complete Form 709, specific information and documentation are necessary. This includes details about the donor and each donee, a description of the gifted property, its fair market value at the time of the gift, and the transfer date. For non-cash gifts like real estate or business interests, professional appraisals may be required for accurate valuation. Maintaining records of all gifts is important for future reference.

IRS Form 709 can be obtained directly from the IRS website or through tax preparation software. The form requires careful completion, with sections for reporting gifts to individuals, gifts to trusts, and elections like gift splitting. Donors must ensure all relevant parts of the form are filled out accurately, especially when applying exclusions or deductions. Incorrectly completed forms can lead to processing delays or further inquiries from the IRS.

The filing deadline for Form 709 is April 15th of the year following the calendar year in which the gift was made. For example, gifts made in 2025 require a Form 709 to be filed by April 15, 2026. If April 15th falls on a weekend or holiday, the deadline shifts to the next business day.

An extension to file Form 709 can be obtained. If a donor files an extension for their federal income tax return (Form 1040), this automatically extends the due date for Form 709 to October 15th. Alternatively, a donor can specifically request an extension for Form 709 by filing Form 8892, which also extends the deadline to October 15th. While an extension provides more time to file the return, it does not extend the time to pay any gift tax that might be owed.