IRC 2502: Who Pays the Federal Gift Tax?

The United States government imposes a tax on the transfer of property from one individual to another when the recipient does not pay full value. This transfer is commonly known as a gift, and understanding the system is important for anyone considering making a substantial one. The tax is structured around the concept of a “taxable gift,” which is the value of a gift after certain exclusions are applied. The government allows individuals to give up to a certain amount to any number of people each year without tax implications; it is the gifts that exceed this annual threshold that become subject to the tax rules.

Donor Liability for the Tax

Internal Revenue Code Section 2502 states that the donor, the individual making the gift, is legally responsible for paying any gift tax that may be due. This primary liability rests solely with the person transferring the property, not the person receiving it. The tax is calculated based on the donor’s entire history of giving, making it a personal obligation.

In specific situations, the liability can shift. If the donor fails to pay the tax owed by the deadline, the IRS may seek payment from the donee, the recipient of the gift. This is a secondary enforcement mechanism, and the donee’s liability is generally limited to the value of the gift they received.

Calculating the Tentative Tax

The gift tax calculation uses a cumulative approach, meaning all past and present gifts are considered. The process begins by determining the tax on the total sum of all taxable gifts made throughout the donor’s lifetime, up to and including the current calendar year. This calculation uses the tax rate schedule in effect for the year the calculation is being performed.

The next step involves calculating the tax on the sum of all taxable gifts made in all previous years, excluding the gifts from the current year. This calculation must also use the current year’s tax rate schedule, not the rates from when the prior gifts were made. This ensures the entire gift history is evaluated under a consistent tax structure.

The final step is to subtract the tax calculated on prior years’ gifts from the tax calculated on all lifetime gifts. The resulting difference is the tentative gift tax for the current year’s gifts, before the application of any credits.

For example, imagine a donor made $2 million in taxable gifts in previous years and makes an additional $1 million taxable gift this year. To calculate the tentative tax, one would first find the tax on the cumulative $3 million in gifts using the current rate schedule. Then, they would find the tax on the prior $2 million in gifts, also using the current rate schedule. Subtracting the second figure from the first reveals the tentative tax due on this year’s $1 million gift.

Applying Credits Against the Tax

After determining the tentative tax, the next step involves applying available credits, which can reduce or even eliminate the tax owed. The primary tool for this is the unified credit against gift and estate tax, a provision detailed in Internal Revenue Code Section 2505. This credit is a dollar-for-dollar reduction of the calculated tentative tax. For 2025, the basic exclusion amount translates to a lifetime credit that can absorb the tax on $14.12 million of taxable gifts.

The unified credit is applied against the tentative tax calculated for the current year. The amount of credit available to a donor is the total lifetime credit minus any amount used to offset tax on gifts made in prior years. As a donor makes large taxable gifts, they gradually use up their available credit, which is tracked each time a gift tax return is filed.

For most individuals, the unified credit is substantial enough to ensure they will never pay gift tax out-of-pocket. Even if a person makes a taxable gift exceeding the annual exclusion, they will likely only need to file a return to report the gift and show how much of their lifetime unified credit was used.

Required Tax Return and Payment

The donor must report taxable gifts on Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. This form is used to detail the gifts made during the year, calculate the tentative tax, and apply the unified credit to determine if any tax is actually due.

The filing deadline for Form 709 is generally aligned with the individual income tax return deadline, which is April 15 of the year following the year the gift was made. An extension to file an income tax return will also extend the time to file Form 709. However, an extension to file is not an extension to pay; if tax is owed, it must be paid by the original April 15 deadline to avoid penalties and interest.

If the calculations on Form 709 show that a gift tax payment is due, the payment must be submitted to the IRS. Donors can make payments through several methods, including IRS Direct Pay from a bank account, debit or credit card payments, or by mailing a check or money order.