Overview of Federal Gift Taxes
Gift taxes are taxes on money or property you gifted during your lifetime. Gift taxes are placed on gifts given to any person while still living, and only apply on gifts of certain value. The federal gift tax was created so taxpayers would not give everything away before death in order to completely avoid the federal estate taxes.
Starting in 2018, you can gift up to $15,000 (up from $14,000 in 2017) in cash or assets to an unlimited number of different recipients each year without paying the federal gift tax. If married, you and your spouse can gift up to $30,000 per year per recipient. The annual exclusion is indexed for inflation.
Example: You gave $14,500 in 2018 to your best buddy, Paul. No federal gift tax.
Example: Sam, your 19-year old third cousin, needed to buy a car in order to get to work. You gift him $19,500. You owe $4,500 federal gift tax. You will have to fill out a gift tax return even though you do not owe any tax (because of the operation of the unified federal gift and estate tax).
Example: You paid $15,500 medical school tuition of your granddaughter directly to her medical school. This is exempt from federal gift tax.
If you made a gift to any one person during the year over the annual exclusion (currently $15,000), you are subject to the federal gift tax and must file IRS form 709.
What if I Gift More Than the Allowed Annual Exclusion?
Even if you go over the annual gift tax exclusion, you still are not subject to the gift tax because of the $11.2 million lifetime gift and estate tax exclusion (increased in 2018 through 2025 by the 2017 Tax Cuts and Jobs Act; starting 2026, the lifetime gift and estate tax exclusion reverts back to their 2017 level, indexed for inflation). The lifetime gift tax exclusion and the estate tax exclusion are expressed as one amount and called the "unified credit". So all the gifts you made over the years or left in your estate are un-taxed until they reach the $11.2 million limit.
However, the IRS does not want you to wait until you die to find out about your taxable gifts over the years. Rather, you must file a return and report your taxable gifts each year; the net result is that you are keeping a running tally of the gifts and subtracting the gift taxes owed from the unified credit. Any unified credit not used against the gift tax over the course of your life is available to reduce any federal estate tax. If during your lifetime, you make taxable gifts of $11.2 million, you have used up the unified credit and upon your death, your estate will be paying the federal estate tax.