When considering giving a significant amount of money or assets to a loved one, gift taxes can play a crucial role in your decision-making. A tax-efficient wealth transfer relies on understanding and using exemptions, exceptions, and exclusions to the federal gift tax. Learn more about when and how the gift tax applies and what strategies can help set you and your loved ones up for success.
Personal finance
A comprehensive guide to gift taxes
Learn about gift tax rules, exclusions, and limits. Understand annual and lifetime exclusions, rates, and strategies to minimize taxes on your gifts.
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What is the gift tax?
A gift tax is a federal tax paid by the giver when making a gift over a certain amount. It applies to most gifted items, from cash to real estate and other assets. The gift tax differs from the estate tax in that it applies to transfers made during the giver's life, not after.
Some important terms to know when talking about the gift tax are exclusion, exemption, and exception. Each of these can be used strategically to transfer wealth without incurring gift tax:
- Exclusion: the amount of money that can be given to someone without gift tax each year.
- Exemption: the cumulative amount that can be given without gift tax in a lifetime.
- Exception: a type of transfer that does not incur gift tax.
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How much can you gift tax-free?
Exclusions and exemptions are essential for tax-efficient wealth transfer. By gifting assets under the tax-free gift limit, you can minimize taxes each year and over the course of a lifetime.
Not all gifts are subject to gift tax. Examples of exceptions include education payments like school tuition, charitable donations, medical expenses, and political contributions. You can also give unlimited assets to your spouse without incurring gift tax, provided that both you and your spouse are U.S. citizens.
Annual gift tax limit
The annual gift tax limit—or exclusion—is the amount that a donor can give to any individual (other than a spouse) without incurring gift tax. In 2024 the tax-free gift exclusion was $18,000. In 2025 that number rose to $19,000. That means, in 2025, gifts above $19,000 must be reported to the IRS on Form 709 in 2026 (the year after the gift was given).
The annual exclusion amount is subject to change and may change yearly as we saw from 2024 to 2025. The annual gift tax limit is adjusted for inflation in $1,000 increments. That means in a low-inflation year the gift tax limit may not increase.
Donors can give gifts at or below the annual tax limit to an unlimited number of recipients without incurring a tax.
That means you can gift $19,000 yearly to each of your friends or children tax-free. Instead of gifting large sums of money at once, you can gift to your loved ones in small amounts over multiple years, reducing the potential effects of taxes on a larger transfer of wealth.
Lifetime gift tax limit
The lifetime gift tax exemption is another key consideration in wealth transfer and estate planning. As of 2025, the limit is $13.99 million per donor, but it's scheduled to drop to approximately $7 million in 2026. If you exceed this limit during your lifetime, the excess amount incurs federal gift tax.
Any gift above the annual gift tax limit given during your lifetime reduces your lifetime gift tax limit. This means that if you use $5 million of your exemption through lifetime gifts, only $8.99 million (in 2025) or potentially $2 million (in 2026) would remain to shield your estate from federal estate tax.
This dynamic can significantly influence your wealth transfer strategy, as you may need to balance the benefits of gifting during your lifetime with the need to preserve your exemption for future estate tax considerations.
The relationship between annual and lifetime gift tax limits
When dealing with estate planning, it's crucial to understand the relationship between annual and lifetime gift tax limits. Gifts at or below the annual exclusion of $19,000 do not count toward the lifetime exemption limit. So, you can gift $19,000—or that year's annual limit—to as many people as you like, every year while facing no gift tax. That's a major win for tax efficiency.
However, as soon as you exceed the annual limit, the excess amount must be reported on a gift tax return and will count against your lifetime exemption. For example, if you give $119,000 to one person in 2025, the excess of $100,000 over the annual exclusion would be reported to the IRS and would reduce your lifetime exemption. This means that if your lifetime exemption is $13.99 million in 2025, it would be reduced to $13.89 million after this gift.
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How much is the gift tax rate?
The federal gift tax rate is 18%–40%. It applies when the total value of gifts you give over your lifetime exceeds the allotted lifetime exemption. For example, if you have already used $10 million of your $13.99 million lifetime gift tax exemption and you give a gift of $5 million, the excess $1.01 million would be subject to gift tax. The tax is calculated on the amount that exceeds the lifetime exemption.
Additionally, some states may impose their own gift tax, so it's important to consider both federal and state tax implications when making large gifts.
Gift taxes, like income taxes, are marginal. This means the rate of tax increases as the amount gifted increases, and each portion of the gift that falls within a specific range is taxed at the corresponding rate.
For example, for amounts above the lifetime exemption:
- The first $10,000 is taxed at 18%.
- The next $10,000 is taxed at 20%, and so on.
- Amounts above $1 million are taxed at 40%.
The table below shows how gift tax applies with the dollar amounts representing the excess over the lifetime limit, $13.99 million in 2025:
| Taxable amount | Tax rate |
|---|---|
| $0–$10,000 | 18% |
| $10,001–$20,000 | 20% |
| $20,001–$40,000 | 22% |
| $40,001–$60,000 | 24% |
| $60,001–$80,000 | 26% |
| $80,001–$100,000 | 28% |
| $100,001–$150,000 | 30% |
| $150,001–$250,000 | 32% |
| $250,001–$500,000 | 34% |
| $500,001-$750,000 | 37% |
| $750,001–$999,999 | 39% |
| $1,000,000 and up | 40% |
Special gift tax exception
A special gift tax exception applies to payments for education and medical expenses. There's no limit when it comes to these items, presenting a great opportunity for tax efficient gifting. Note that exceptions only hold when gifts are made directly to institutions. That could mean writing a check directly to your daughter's school for her tuition or directly paying a hospital for your brother's kidney transplant. Contributions to a 529 plan are counted as gifts and therefore do not fall into this special exception category.
It's smart to consider how paying for big ticket items in the special exceptions category could reduce the effects of taxes over your lifetime. Gifts like college tuition are some of the most powerful and, luckily, they're gift tax free.
Common methods to reduce gift taxes: Gift splitting and gifts in trust
Gift splitting
Gift splitting is a strategy that allows married couples to double the annual gift tax exclusion amount. For example, instead of one person being able to gift $19,000 to one recipient without incurring gift tax, a married couple can gift up to $38,000 to that same individual.
To qualify for gift splitting, married couples must agree to the gift and sign and file a gift tax return (Form 709) before the tax filing deadline for the year in which the gift was made. It's important to note that the rules for gift splitting may be affected by whether a couple lives in a community property state.
If you're married, you have a great opportunity to multiply the positive effects of the annual exclusion—it's often worth taking advantage of this.
Gifts in trust
By placing assets in a trust, you can transfer wealth while incurring less gift tax. This structure enables you to spread out gifts over time, reducing the tax burden and ensuring that your beneficiaries receive the maximum benefit.
The IRS determines tax liability based on whether the gift is of present interest (immediate access) or future interest (deferred access). A "Crummey trust" turns what would otherwise be a future interest into a present interest to ensure that the grantor is taking advantage of the annual gift tax exclusion. When assets are added to the trust, the beneficiary has the right to withdraw these funds for a limited amount of time.
However, the expectation is that they will not withdraw the funds. This access means that the gift is of present interest, and the contributions can be counted as part of the annual exclusion.
Beyond gift tax efficiency, other benefits of trusts include protecting assets from divorce or creditors. Trusts can also be strategically used to reduce the impact of the generation-skipping tax.
Frequently asked questions about taxes
In 2025, the gift tax rate ranges between 18% and 40%. Gift tax rates are marginal, meaning they increase as the value of the gift increases. The tax is charged on only the portion of the gift that surpasses the lifetime exemption limit.
Gifts to children of all ages are subject to the same gift tax rules as gifts to adults. Gifts to minors through 529 plan contributions and UTMA or UGMA accounts also count toward the lifetime gift tax limit.
Gift taxes are only charged once the lifetime limit is exceeded. For example, with the 2025 lifetime exemption of $13.99 million, if you give a gift of $15 million, only the excess $1.01 million would be subject to gift tax. This $1.01 would be taxed marginally, with the highest marginal rate reaching 40%. See chart above for further details.
The more you know about gift tax, the better equipped you are to approach it efficiently. Some of the best ways to do this make use of the annual gift tax exclusion and lifetime exemption.
You can also take advantage of special gift exceptions like charitable donations, tuition payments, and medical expenses. Setting up a trust is another great way to ensure more of your money goes to your loved ones and legacy.
Maximize your gifting strategy with wealth management services
Each gifting decision is a big one.
Vanguard Wealth Management can help you make decisions backed by expertise and strategy.
A relationship manager or advisor can help you explore options like trusts, donor advised funds, and gift splitting. They become your point person for building your legacy. So, the impact of your gifting and legacy is designed to last.
Neither Vanguard nor its financial advisors provide tax and/or legal advice. This information is general and educational in nature and should not be considered tax and/or legal advice. Any tax-related information discussed herein is based on tax laws, regulations, judicial opinions and other guidance that are complex and subject to change. Additional tax rules not discussed herein may also be applicable to your situation. Vanguard makes no warranties with regard to such information or the results obtained by its use and disclaims any liability arising out of your use of, or any tax positions taken in reliance on, such information. We recommend you consult a tax and/or legal advisor about your individual situation.
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For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Vanguard Marketing Corporation serves as distributor for some 529 plans.