IRS Gifting Rules and Tax Exemption Limits

A gift is a transfer of money or property, such as cash, stocks, or real estate, to another individual without receiving something of equal value in return. The U.S. has a system to tax these transfers, but exemptions and exclusions mean most people will never owe this tax. The system is designed to track significant wealth transfers, ensuring they are accounted for during a person’s lifetime or after their death.

Understanding Tax-Free Gifting

The annual gift tax exclusion is the most common way to give gifts without tax consequences. For 2025, an individual can give up to $19,000 to any other person without needing to report the gift to the IRS. This exclusion applies per recipient, per year, so a person could give $19,000 each to several individuals in the same year without any tax filing.

Certain payments are not considered taxable gifts, regardless of the amount. These include tuition payments made directly to an educational institution and medical expenses paid directly to a medical care provider. For both exceptions, the payment must go to the service provider, not to the individual receiving the benefit.

Married couples can use gift splitting to increase their tax-free giving. By combining their individual annual exclusions, a couple can give up to $38,000 to a single recipient in 2025 without tax implications. For example, a couple could jointly give their child $38,000 for a down payment on a house. Even if the money comes from one spouse’s account, it is treated as if each spouse gave half, keeping the gift under their individual exclusion limits.

The Lifetime Gift and Estate Tax Exemption

If a gift to one person in a year exceeds the annual exclusion, it doesn’t automatically result in a tax bill. The excess amount is applied against the donor’s lifetime gift and estate tax exemption. This unified credit covers gifts made during life and assets left in an estate. For 2025, the lifetime exemption is $13.99 million per individual.

Making a gift that surpasses the annual exclusion requires the donor to file a gift tax return for tracking purposes. The return informs the IRS that a portion of the lifetime exemption has been used. For example, if you give a relative $50,000 in 2025, the first $19,000 is covered by the annual exclusion. The remaining $31,000 is subtracted from your $13.99 million lifetime exemption.

The gift and estate taxes are linked through this unified credit. Each dollar of the lifetime exemption used for gifts reduces the amount available to shelter an estate. A person or their estate will only owe tax after the entire lifetime exemption is exhausted. The tax rates on the excess amount range from 18% to 40%.

The current high lifetime exemption amount is temporary. Under current law, it is scheduled to expire at the end of 2025. In 2026, unless Congress acts, the exemption will revert to its pre-2018 level, adjusted for inflation, which is projected to be about half of the current amount.

Required Information for a Gift Tax Return

The donor, not the recipient, is responsible for filing a gift tax return (IRS Form 709). A return is required if you give a gift exceeding the annual exclusion, split gifts with your spouse, or give a gift of a future interest, which the recipient cannot immediately access.

To complete Form 709, you must gather specific information for each gift. This information can be found on the official form and instructions available on the IRS website. You will need to provide:

• The donor’s and donee’s full name, address, and relationship to you.
• A complete description of the gift.
• The date the gift was made.
• The fair market value (FMV) of the gift on the date of the transfer.
• Your adjusted basis in the property, which is what you originally paid plus improvements, minus depreciation.

The adjusted basis is important because it becomes the recipient’s basis in the property. For assets like stocks or real estate, FMV is the price at which the property would change hands between a willing buyer and seller.

The Process of Filing a Gift Tax Return

The filing deadline for Form 709 is April 15 of the year after the gift was made, aligning with the income tax deadline. An extension for your personal income tax return automatically applies to your gift tax return, moving the deadline to October 15.

Form 709 must be mailed to the IRS, as it cannot be filed electronically. The correct mailing address, which depends on the donor’s state and whether a payment is included, is provided in the form’s instructions.

The IRS uses the filed return to track the portion of your lifetime exemption that has been used. No tax payment is due unless your cumulative taxable gifts have exceeded your entire lifetime exemption.