What Is the Lifetime Gift Tax Exemption?
Learn how the lifetime gift tax exemption allows for significant tax-free giving and how it coordinates with annual gift limits and your future estate.
The United States federal gift tax applies to the transfer of property or assets from one person to another without receiving something of at least equal value in return. The purpose of this tax is to prevent individuals from avoiding the federal estate tax by giving away their wealth before they pass away. The tax framework ensures that substantial transfers of wealth, whether made during a person’s lifetime or at their death, are subject to a consistent set of rules.
What Qualifies as a Taxable Gift
The Internal Revenue Service (IRS) defines a gift broadly as any transfer to an individual, either directly or indirectly, where full consideration is not received in return. This definition is not dependent on the donor’s intent; even if a transfer is not intended to be a gift, it can be classified as one if the donor does not receive property of equal value. Common examples of gifts include cash, stocks, real estate, and the forgiveness of a debt. When a non-cash asset is gifted, its value is determined by its Fair Market Value (FMV) on the date of the transfer.
Certain transfers are specifically excluded from the definition of a taxable gift and have no tax consequences for the donor. These include:
- Payments made directly to an educational institution for someone’s tuition.
- Payments made directly to a medical facility or provider for an individual’s healthcare expenses.
- Gifts made to a spouse who is a U.S. citizen.
- Contributions to qualifying political organizations.
Annual and Lifetime Gift Tax Exemptions
The tax code provides two primary exemptions to shield most gifts from taxation. The first is the annual gift tax exclusion. For 2025, an individual can give up to $19,000 to any number of people without any tax consequences or the need to file a tax return.
A provision known as gift splitting allows a married couple to combine their annual exclusions. Together, they can give up to $38,000 to a single recipient in 2025 without making a taxable gift.
For gifts that exceed the annual exclusion amount, the lifetime gift tax exemption comes into play. This is a much larger, cumulative amount that shelters gifts from tax. For 2025, the lifetime exemption is $13.99 million per individual. When a gift exceeds the annual exclusion, the excess amount is subtracted from the donor’s lifetime exemption. No tax is owed until the entire lifetime amount has been exhausted.
This high exemption amount is temporary, as it was established by the Tax Cuts and Jobs Act of 2017 and is scheduled to expire at the end of 2025. If Congress does not act, the exemption will revert to its pre-2017 level. On January 1, 2026, the amount is expected to be approximately $7 million per individual after inflation adjustments.
Connection Between Gift Tax and Estate Tax
The gift tax and federal estate tax are linked through a unified credit. The lifetime gift tax and estate tax exemptions are not separate amounts but are components of a single credit for transfers made during life and at death. This system provides one total exemption amount to use against both taxable gifts and the value of an estate.
Any portion of the lifetime gift tax exemption used during one’s life directly reduces the exemption available to shelter their estate from tax. For example, if an individual with the full $13.99 million credit in 2025 uses $3 million for a taxable gift, only $10.99 million will remain to protect their assets from estate tax upon death. This integration prevents individuals from using separate exemptions to pass on more wealth tax-free.
Gift Tax Return Filing and Calculation
A gift tax return, IRS Form 709, must be filed when making a gift to any single individual that exceeds the annual exclusion ($19,000 for 2025). Filing is also necessary if you and your spouse split gifts to combine your annual exclusions. The return is due by April 15th of the year following the gift, but this deadline can be extended with your income tax return.
On Form 709, you must provide details about the donor, recipient, and a description of the gift and its value. The primary function of the return for most filers is not to pay tax but to document the amount of the lifetime exemption used. This creates a running tally that the IRS tracks over a person’s lifetime.
If cumulative taxable gifts exceed the available lifetime exemption, a gift tax becomes due, with rates from 18% to 40%. The responsibility for paying the gift tax falls on the donor, not the recipient. The recipient generally has no tax obligations related to receiving the gift.