A gift tax is a tax imposed on the gift giver, not the recipient. Therefore, it falls into a category different from income taxes. At first glance, gift taxes may seem complicated because there is both a lifetime exclusion amount and an annual gift exclusion amount. The current Internal Revenue Service (IRS) lifetime gift tax exclusion amount is set at $13.99 million, and the annual gift amount is set at $19,000 for 2025. If you exceed your annual limit, you will need to report it to the IRS using Form 709. While these gift tax thresholds are high, many people ask, “How do I avoid paying gift tax?”
What is a gift tax?
The federal gift tax can be assessed on any payments you make to another person without getting something of comparable value in return. The gift giver is responsible for keeping track of how much money they gift and paying the gift tax if the value exceeds the annual and lifetime exclusion amounts.
As long as your annual gifts to each recipient stay below the annual exclusion thresholds, you do not have to pay taxes on the gifts or even report them to the IRS. You can gift money to as many people as you want to, and the annual exclusion applies to each one individually.
Each time your annual gift to an individual exceeds the annual gift exclusion, you are required to report the excess to the IRS. These excess annual gift contributions from all gifts you make accumulate over a lifetime. Once your gift contributions exceed the lifetime gift exclusion amount, you are responsible for paying taxes on them.
Gifts to a spouse or a minor child are excluded when calculating gift taxes. Contributions sent on behalf of someone to an educational institution or to pay for medical care or health insurance are also exempt from gift taxes.
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How much should you expect to pay in gift taxes?
When you owe gift taxes, it will be calculated based on your tax bracket. The tax rate can vary from 18% to 40%. Depending on how much you exceed your lifetime gift tax exemption, you can expect to pay a large chunk of your gift as taxes. This is why many people are interested in ways to reduce their gift tax responsibilities.
How can you reduce your gift tax responsibilities?
If you have a large amount to gift over your lifetime, there are several strategies you can take to reduce your gift tax burdens.
Start gifting early
Gift taxes are calculated both annually and over a lifetime, and amounts that exceed the annual gift exclusion accumulate and contribute to your lifetime gift tax exclusion amount. Spreading your gifts to each individual over an extended period can allow you to stay under the annual gift tax exclusion threshold each year. This will enable you to gift more money to each individual without owing taxes.
Use your lifetime gift tax exclusion
The 2025 IRS lifetime gift tax exclusion is set at a generous $13.99 million. As long as your excess annual gifts to individuals total less than the lifetime gift tax exclusion threshold, you will not owe taxes.
The IRS sets the lifetime gift tax exclusion yearly, and as the political environment changes, the rules determining lifetime annual gift taxes are expected to change.
Take advantage of marital gift splitting
Each spouse is treated independently when determining gift taxes. Married couples can combine their annual exclusions to stay under the annual gift tax threshold and avoid paying gift taxes.
In 2024, the annual gift tax exclusion is $18,000, so a married couple can gift $36,000 and still stay under the annual gift tax exclusion threshold. However, you will need to file a return if your spouse isn’t a U.S. citizen and when you exceed the $190,000 annual gifting limit for non-U.S. citizen spouses.
When a spouse is deceased, any unused portion of their lifetime gift exclusion is added to the surviving spouse’s exclusion.
Take advantage of the exceptions for paying educational or medical expenses
If you pay for a gift recipient’s educational or medical expenses directly, they are exempt from the annual gift tax calculation.
To qualify, the gift must be paid directly to the medical or educational institution or directly to the insurance provider. If you give the money directly to a recipient intending to pay for their medical or educational expenses, it will still be subject to the gift tax.
Gift appreciated assets
If you gift appreciated assets at their current fair market value, you won’t have to pay gift taxes on them as long as you stay under the annual gift exclusion threshold. Gifting appreciated assets is a good way to avoid paying capital gains taxes on your assets and reduce estate taxes on your property. Your gift can continue to increase in value in your recipient’s hands without incurring any additional gift taxes.
What are some examples of taxed and untaxed gifts?
When determining whether a gift is taxed, consider whether its value falls under the annual gift tax exclusion threshold and whether it is exempt from gift taxes.
Taxed gifts include:
- Real estate
- Cash or checks
- Vehicles
- Boats
- Loans without interest requirements or at below-market rates
- Stocks and securities
- Forgiving a debt
Non-taxable gifts include:
- Tuition payments made directly to educational institutions
- Medical expenses paid directly to healthcare providers
- Gifts or donations to qualified charities
- Gifts to spouses
- Political contributions
Strategic gift-giving can reduce the value of your taxable estate, reducing or even eliminating the taxes your heirs are responsible for paying.
You can schedule a call with us or reach out to us directly at 855.356.0573 to learn more about how best to plan today to protect those most important to you.
