A guide to the gift tax

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

Derek Silva

Derek Silva

Published January 3, 2020

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KEY TAKEAWAYS

  • Gift tax applies for any gift you give in excess of the annual exclusion — $15,000 in 2020 (the same as 2019)

  • 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 — $11.58 million in 2020, up from $11.4 million in 2019

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

When you give a gift to someone, the Internal Revenue Service (IRS) requires you to pay tax if it’s worth more than a certain amount. This is the federal gift tax. In 2020, you can gift any individual up to $15,000 for the year, just as you could in 2019. Gifts to your spouse and certain tax-exempt organizations are exempt from gift tax.

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. If you sell someone an asset for less than it’s actually worth, that difference in actual value and sale value also qualifies as a gift.

Whenever you give a gift worth more than the annual exclusion ($15,000 in 2019 and 2020) in a given year, you need to file a gift tax return for that tax year. Tax only applies to the value in excess of the exclusion, but you still don’t have to pay tax unless you have also given more than the lifetime exclusion ($11.4 million in 2019 and $11.58 million in 2020). The IRS will simply decrease your remaining lifetime exclusion by the amount of your taxable gift.

Your lifetime giving limit is also the same as your federal estate tax exemption, so giving large gifts increases the likelihood that your estate will owe tax when it’s passed on (though very few estates — less than 1% — qualify for estate tax). You may want to consult with an estate planning lawyer if you’re using annual gifts to transfer your estate before your death.

What qualifies as a gift?

A gift is any money or property that you give to someone else without the expectation that they will pay you back. This includes giving money, an interest-free loan, property, or other assets like stock options. For the sake of paying taxes, the IRS only cares about gifts worth more than the annual exclusion, which was $15,000 in 2019 and remains $15,000 in 2020.

Property also qualifies as a gift if you sell it to someone 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.

Exemptions to the gift tax

Not all gifts are subject to tax, so the gift tax doesn’t apply to them. The following four types of gifts are exempt from the gift tax:

  • Gifts to your spouse, no matter the value
  • Gifts that are less than or equal to the annual exclusion
  • The educational exclusion: tuition payments you make for someone, if you pay the institution directly
  • The medical exclusion: medical expenses you pay for someone, if you pay the medical facility directly
  • Gifts to a political organization for its use

If your spouse is not a U.S. citizen, the maximum you can give tax-free is $157,000 in 2020, up from $155,000 in 2019.

The gift tax also doesn’t apply when giving to certain tax-exempt organizations:

  • A 501(c)(4) social welfare organization or civic league
  • A 501(c)(5) labor, agricultural, or horticultural organization
  • A 501(c)(6) business association, such as a chamber of commerce

None of the giving above affects your federal income tax return. They are considered tax-free gifts and you cannot deduct any of them on your taxes. However, you can make a deduction for charitable contributions that you make, as long as the charity has received tax-exempt status by the IRS .

The annual & lifetime exclusions

There are two main numbers to know when you talk about the gift tax: the annual exclusion and the lifetime exclusion.

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 pay gift tax. The annual exclusion is indexed to inflation, so it changes every few years.

For 2020, the annual exclusion is $15,000 per person, same as it was in 2019. That means you can give up to $15,000 to multiple individuals without paying tax.

Tax yearAnnual gift tax exclusion
2018-2020$15,000
2013-2017$14,000

If your gifts to any individual or organization during the year are worth more than the exclusion, you will pay gift tax on the value of the gifts that exceeds the exclusion. When making a gift to a trust, each trust beneficiary is considered a recipient of your gift and you can still gift each $15,000 per year.

If you and your spouse want to gift something that you jointly own, the same annual exclusion applies: You can each give up to $15,000 in 2020. If something is considered 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.

The lifetime gift tax exclusion

Each person can give a certain amount in tax-free gifts throughout their lifetime without having to pay tax. This is known as the lifetime exclusion. You may also see the term lifetime exemption. Once you have given more than the lifetime exclusion, you must pay tax on the value of all of the gifts you give.

The lifetime exclusion only applies when you give gifts that are worth more than the annual exclusion. If you give someone a $20,000 gift in 2020, your lifetime exclusion would be lowered by $5,000 because that’s how much of your gift exceeds the annual exclusion. Even after passing the lifetime exclusion, you can still give up to the annual amount without paying gift tax.

Tax yearLifetime gift tax exclusion
2020$11.58 million
2019$11.4 million
2018$11.18 million
2017$5.49 million
2016$5.45 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.

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The gift tax & estate tax

Your lifetime gift tax exclusion is also the same as your estate tax exemption. 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 ($11.40 million in 2019 and $11.58 million in 2020).

When you make gifts that decrease your lifetime exclusion, you are also decreasing your estate tax exemption. You may see the term unified tax credit or unified credit. These terms refer to the fact that your lifetime gift exclusion and estate tax exemption are the same.

As an example, let’s say you gift your child $215,000 in 2019. You will exceed the annual exclusion by $200,000 and so 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 $11.2 million. If you then passed away in 2019, your estate would not be taxed except on its value that exceeds $11.2 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, also referred to as the GST, GSTT, or transfer tax. The GST applies when someone gifts money and assets to grandchildren or to any unrelated person who is at least 37.5 years younger than the donor. It’s meant as a way to prevent someone from passing an estate to grandchild in order to avoid paying the estate tax twice (once when passing to your child and then again when they pass it to their child).

The generation-skipping tax exemption is the same as the annual and lifetime gift tax exclusions.

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, titled United States Gift (and Generation-Skipping Transfer) Tax Return.

You do not need to file a tax return if you are giving less than the annual exclusion or one of the exempt gifts mentioned earlier, such as gifts to your spouse. Even if you give something that you and your spouse jointly own, you each need to file an individual gift tax return.

However, you do not actually need to pay gift tax unless you have exceeded your lifetime gift tax exclusion. The IRS will simply track your gifts and lower your lifetime exclusion (and estate tax exemption).

To help yourself track all of your taxable gifts, it’s useful to keep copies of every gift tax return you file. This will prevent you from being surprised by a lower estate tax exemption later in life. If you do not have a copy of your tax return, you can request a free copy from the IRS with a tax transcript.

The person giving the gift is always responsible for the tax, but it is possible for the recipient to elect to pay the tax. Talk to a tax professional to learn more about this option.

If you would prefer to pay the gift tax in a given year instead of just lowering your lifetime exclusion, you can do so. The gift tax rates range from 18% to 40% and only apply to the value of your gift that exceeds the annual exclusion. There are marginal tax brackets, just like with the federal income tax.

Gift tax rates for 2019 & 2020

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%

Note that the gift tax rates are the same as the federal estate tax rates.

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