Your guide to the gift tax

The federal gift tax applies whenever you give someone besides your spouse a gift worth more than $15,000.

Derek Silva

By

Derek Silva

Derek Silva

Personal Finance Expert

Derek is a personal finance editor at Policygenius in New York City, and an expert in taxes. He has been writing about estate planning, investing, and other personal finance topics since 2017. He especially loves using data to tell a story. His work has been covered by Yahoo Finance, MSN, Business Insider, and CNBC.

Updated March 3, 2021|7 min read

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Key Takeaways

  • Gift tax is a federal tax on money or assets you give that are worth more than the annual exclusion of $15,000

  • You need to file a gift tax return using IRS Form 709 any year in which you exceed the annual exclusion

  • You don’t actually owe gift tax until you exceed the lifetime exclusion, which is $11.7 million in 2021

  • Each taxpayer needs to file their own return to the IRS, even if the gift was jointly owned

In 2021, you can give any individual up to $15,000 without you having to pay any tax on that gift. When you give someone money or property worth more than $15,000, the Internal Revenue Service (IRS) may require you to pay federal gift tax on the gift value above $15,000. There are no state-level gift taxes.

A “gift” is anything that you don’t expect to receive fair payment for. That includes giving money, investments, property, and any other tangible or intangible assets. You will need to file a federal gift tax return if you gave any gifts that exceed the $15,000 annual exclusion, but you don’t actually have to pay gift tax unless you have also exceeded your lifetime exclusion, which is $11.78 million in 2021.

Your lifetime giving limit is also the same as the federal estate tax exemption, so giving large gifts increases the likelihood that your estate will owe tax after you die (though very few estates qualify for estate tax). You may want to consult with an estate planning lawyer if you’re using annual gifts in order to transfer assets and decrease your estate value before your death.

What is gift tax?

Gift tax is a federal tax on any gifts you give during the year that are worth more than the annual gift tax exclusion, which is $15,000 for gifts given in 2021 (the exclusion was the same in 2019 and 2020). There are no state gift taxes.

Giving away more than $15,000 requires you to complete a federal gift tax return, though you don’t actually have to pay any tax until your combined lifetime gifts (in excess of the annual exclusion) exceed the lifetime gift tax exclusion, which is $11.70 million in 2021 (up from $11.58 million in 2020).

What qualifies as a gift?

For gift tax purposes, a gift is any money, property, or other asset that you give someone else without the expectation that they will pay you back. This includes giving money in any form, interest-free loans, real estate, personal possessions, and intangible assets like stock options.

Something also qualifies as a gift if you sell it for less than its fair market value. Fair market value, or FMV, is the amount you can reasonably expect someone to pay if you sold something on the open market. The difference between FMV and your sale price is the amount that counts as a gift. So if your house is reasonably worth $250,000 but you sell it to a relative for $150,000, then you have given a gift of $100,000 ($250,000 - $150,000) and will need to file a gift tax return for that $100,000.

If you’re looking to transfer assets to your heirs while minimizing taxes, consider creating a revocable trust.

Exemptions to the gift tax

Not all gifts are subject to gift tax. The following are exempt from the gift tax:

  • Gifts to your spouse, no matter the value (if your spouse is a citizen)

  • Gifts that are less than or equal to the annual gift tax exclusion

  • Gifts to a political organization for its use

  • Tuition payments you make for someone, if you pay the institution directly (this is the educational exclusion)

  • Medical expenses you pay for someone, if you pay the medical facility directly (this is the medical exclusion)

  • Gifts to certain tax-exempt organizations, like a 501(c)(4) social welfare organization or civic league; a 501(c)(5) labor, agricultural, or horticultural organization; or a 501(c)(6) business association, such as a chamber of commerce

If your spouse isn’t a U.S. citizen, the maximum you can give tax-free is $159,000 in 2021 (up from $157,000 in 2020). Also note that the gifts you give to the tax-exempt organizations listed above are not eligible to include as part of any charitable contributions deductions you claim.

The annual & lifetime gift tax exclusions

There are two main numbers to know when you talk about the gift tax. The annual exclusion is how much you can give in one year before you need to file a gift tax return even though you may not actually owe tax. The lifetime exclusion is how much you can give over the course of your lifetime before you are required to pay gift tax.

The annual gift tax exclusion

The annual gift exclusion is the maximum amount you can give in any calendar year to an individual without needing to file a gift tax return. However, you don’t actually have to pay gift tax unless the value of your lifetime taxable gifts has exceeded your lifetime exclusion. When you file a gift tax return, the IRS will decrease your remaining lifetime exclusion amount by the amount of your annual gift tax return.

For 2021, the annual exclusion is $15,000 per person, as it was in 2020 and 2019. That means you can give up to $15,000 to as many recipients as you want without having to pay any gift tax. If you and your spouse want to gift something that you jointly own, you can each give up to $15,000. If something is community property in your state, you and your spouse are each responsible for half of the value. In all cases, you and your spouse need to file individual gift tax returns. When making a gift to a trust, each trust beneficiary is considered a recipient of your gift and you can still gift each beneficiary $15,000 per year.

Annual gift tax exclusions by year

Tax yearAnnual gift tax exclusion
2018-2021$15,000
2013-2017$14,000

The lifetime gift tax exclusion

Each person can give a certain amount in tax-free gifts throughout their lifetime. This lifetime exclusion (also called a lifetime exemption) is worth $11.70 million in 2021. You must pay tax on all gifts above your lifetime exclusion, though you can still give up to the annual amount without paying gift tax. If you want to give a gift over the annual limit without decreasing your lifetime limit, you must pay gift tax in the year of your gift. The lifetime limit is indexed to inflation and as it increases each year, the amount you can give during your lifetime increases.

As an example, say you give someone a $20,000 gift in 2021. The first $15,000 is exempt from tax but you do need to file a gift tax return for 2021. Your lifetime limit will be lowered by $5,000 because that’s how much of your gift exceeds the annual exclusion. Even if you had already exceeded your lifetime limit, only $5,000 is taxable. If you don’t want to lower your lifetime exclusion, you can opt to pay gift tax on this 2021 gift.

Lifetime gift tax exclusions by year

Tax yearLifetime gift tax exclusion
2021$11.70 million
2020$11.58 million
2019$11.40 million
2018$11.18 million
2017$5.49 million

Note that the lifetime gift tax exclusion more than doubled from 2017 to 2018 because of the Tax Cuts and Jobs Act, a tax reform passed in 2017.

How to file a gift tax return

If you give a gift worth more than the annual exclusion, you need to file a gift tax return using IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. The person giving the gift is always responsible for the gift tax. (Though some states require recipients to pay inheritance tax.)

Each time you report gifts on Form 709, the IRS will decrease your remaining lifetime exclusion accordingly unless you opt to immediately pay the gift tax in that year. (Most people never reach their lifetime gift tax limit, so paying gift tax immediately likely isn’t a serious consideration for most people.) If you ever want a copy of your tax returns, perhaps so you can calculate your remaining lifetime exemption, you can request a free copy from the IRS with a tax transcript.

If you do have to pay tax, the gift tax rates range from 18% to 40% and there are marginal tax brackets, just like with the federal income tax.

Gift tax rates for 2020 & 2021

Value of gift in excess of the annual exclusionTax rate
$10,000 or less18%
$10,001 to $20,00020%
$20,001 to $40,00022%
$40,001 to $60,00024%
$60,001 to $80,00026%
$80,001 to $100,00028%
$100,001 to $150,00030%
$150,001 to $250,00032%
$250,001 to $500,00034%
$500,001 to $750,00037%
$750,001 to $1 million39%
More than $1 million40%

The gift tax & estate tax

Your lifetime gift tax exemption is also the same as your estate tax exemption and you may see them referred to together as part of the unified tax credit or unified credit. Estate tax applies when your estate — the collection of all the money, property, and assets owned — is passed on after your death. However, very few people pay estate tax because you only need to pay on the value of your estate tax that exceeds the exemption amount ($11.70 million in 2021, up from $11.58 million in 2020).

As an example, let’s say you gift your child $215,000 in 2021. You will exceed the annual exclusion by $200,000 and your lifetime gift tax exclusion (and estate exemption) will also decrease by $200,000. If that was the only gift you ever gave, your new exemption is $11.5 million. If you then pass away in 2021, your estate will only have to pay estate tax on its value exceeding $11.5 million.

Learn more in our complete guide to estate planning.

The generation-skipping transfer tax

Additionally, the unified credit includes the generation-skipping transfer tax, sometimes referred to as the GST tax, GSTT, or transfer tax. The GST tax applies when someone gifts money and assets to grandchildren or to any unrelated person who is at least 37.5 years younger. It’s meant as a way to prevent someone from passing an estate to a grandchild in order to avoid paying the estate tax twice (once when passing to their child and then again when the child passes it to their own child). The generation-skipping tax exemption is the same as the annual and lifetime gift tax exclusions.

For more on how to minimize taxes while passing assets to someone multiple generations younger than you, consider a generation-skipping trust.