Do I Have to Pay Taxes on a Gift?

If you give a gift of money, property, or artwork to a friend or family member, you may need to mention it on your income taxes. The Internal Revenue Service (IRS) has a pre-set limit on the amount of gifts you may give annually and over your lifetime.

Remember: The gift-giver pays the gift tax liability, not the recipient.

The federal gift tax exclusion amount is high enough that most gifts fall well below the taxable threshold. The value of the gift must exceed $19,000 in tax year 2025 for individual gifts. The lifetime gift tax exclusion is $13.99 million for 2025. If your total gift amount is below that figure, the IRS will not need to know about your gift.

However, the gift tax is separate from the federal estate tax. An estate tax, or inheritance tax, applies to property transferred through your will. The estate tax exemption applies to estate assets over the exemption value.

In this article, we'll discuss the types of gifts that must be reported to the IRS, as well as common exemptions from the gift tax.

Identifying and Valuing Gifts

A “gift” is something of value given without receiving something of equal value in return. If you give someone a new car and receive only a “thank you” in return, that is a gift. The annual limits and annual lifetime limits for gifts are indexed for inflation and rise slightly each year.

The IRS calculates the gift tax based on the taxable gift’s fair market value. The fair market value of the gift means what a willing buyer would pay on the open market at the time of the exchange.

The gift tax rate varies from between 18% to 40% depending on the value of the property.

The annual gift tax exclusion resets each year until your gifts reach the lifetime gift tax exclusion. For instance, if you gift someone $10,000 each year, you will not reach the $13 million plus lifetime exemption in a normal lifetime.

However, if you gift someone $14 million in one year, you have reached the lifetime limit. Any additional gifts, regardless of size, will be subject to the gift tax.

The gift-giver, or donee, reports the gift and pays any tax due to the IRS. They report gifts on IRS Form 709 and file it with their annual income tax return. Gifts are not included with your income tax, but if you sell the property or item later, you may pay a capital gains tax.

Gift Tax Exemptions

Some gifts are exempt from the gift tax. For example, gifts between spouses are not taxed as long as spouses are U.S. citizens. For non-citizens, there is a limit that changes annually. Check the Form 709 instructions for the current year’s amount.

Other gifts that fall outside the exclusion limit include:

• Tuition and education payments
• Payment for medical expenses
• Gifts to political organizations (separate from donations to candidates)

Below, we discuss a few other common gifts and gestures that, if not handled carefully, can trigger the gift tax.

Gifts That Might Not Be Gifts

Be careful when making large gifts to family and friends. What seems to be a nice gesture can become a taxable gift unless you make your intentions clear. A few examples include:

• Forgiving large debts: If you’ve loaned someone a large sum of money and later forgive the debt, it could trigger a gift tax return if the amount forgiven exceeds the exemption amount. You can structure your loan forgiveness to avoid the annual exemption. Discuss this with your financial advisor before letting your debtor off the hook.
• Using personal property for free: The IRS may consider extended use of valuable property a “gift” depending on the circumstances. Allowing a friend to live in your summer villa in France for a year rent-free might be a gift, especially if you usually rent or lease the property for income.
• Paying for weddings, vacations, or houses: Paying for a child’s wedding is a “gift,” according to the IRS. So is giving a child cash for tuition. Either give the money directly to the school or make all disclosures on your tax returns.

Capital Gains Taxes

When it comes to taxes on gifts, remember:

• The gift-giver pays a tax on the gift at the time they give it.
• The recipient pays the capital gains tax on whatever profit they make after selling it.

The capital gains tax applies to the profit you earn from selling an asset, such as stock, property, or a small business. You will pay capital gains taxes on the value of the property at the time of sale, not at the time of transfer.

The property is assessed at the fair market value at the time of sale, not at the time of the gift.

Avoiding the Gift Tax

If you know your gift will exceed the annual or lifetime gift tax exemption, there are methods you can use to avoid the tax. There is nothing unlawful about structuring gifts this way. You may want to consult your financial advisor or other tax professional to discuss the tax implications of your gift and methods of payment.

Gift splitting: Married couples can each give gifts to the same individual up to the annual exclusion amount without triggering the gift tax. For instance, each parent could give a child $18,000 in tax year 2025 for a total of $36,000 without paying the gift tax.

Gifts to trusts: Trusts receive funds and distribute dividends to the beneficiaries. Rather than making a gift directly to a beneficiary, you can donate to a trust, and the recipient will receive the money from the trust. Your attorney or financial advisor can explain how to establish this type of trust.

Get Legal Advice from an Experienced Tax Attorney

If you want to make a gift to a friend or family member and have questions about the transfer of money or property, get legal advice from a tax attorney or other tax professional. Financial professionals can let you know the tax implications of your gift and advise you on strategies to keep your gift tax-free.