Federal Gift Tax
The federal gift tax is designed to prevent individuals from avoiding the estate tax by simply giving away their property during their lifetime. Without a gift tax, wealthy individuals could transfer entire estates tax-free before death. The gift tax, which is unified with the federal estate tax, ensures that large transfers are taxed whether they occur during life or at death.
A taxable gift is any transfer of property to another person for less than full and adequate consideration in money or money’s worth. This includes cash, securities, real estate, forgiveness of a debt, interest-free loans, and transfers to trusts.
The Annual Gift Tax Exclusion
The most important gift tax planning tool is the annual exclusion. The IRS permits each individual to give up to a specified dollar amount per year to any number of recipients without incurring gift tax liability. The annual exclusion is indexed for inflation in $1,000 increments.
The annual exclusion applies per recipient. A donor may give $18,000 to any number of different individuals in a single year without gift tax consequences. Gifts exceeding $18,000 to any single recipient in a given year must be reported on a gift tax return (Form 709) and reduce the donor’s lifetime unified credit exemption.
Example — Annual Exclusion Gifts
The annual exclusion applies only to gifts of present interests — the recipient must have an immediate right to use, possess, or enjoy the gift. Gifts of future interests (such as certain trust contributions) do not qualify for the annual exclusion.
Gift Splitting
Married couples may elect to split gifts, treating any gift made by either spouse as if made one-half by each. This allows a married donor to effectively use both spouses’ annual exclusions even if only one spouse owns the property being gifted.
To elect gift splitting, both spouses must consent and a gift tax return must be filed for the year of the split gift, even if no tax is owed.
Exclusions in Addition to the Annual Exclusion
Certain payments are excluded from gift tax entirely and do not count against the annual exclusion:
- Direct tuition payments — amounts paid directly to an educational institution for another person’s tuition (room and board do not qualify)
- Direct medical payments — amounts paid directly to a medical provider for another person’s medical care
These exclusions apply regardless of amount and are available in addition to the $18,000 annual exclusion per recipient. They must be paid directly to the institution or provider — not to the student or patient.
The Unlimited Marital Deduction
An unlimited amount may be given to a U.S. citizen spouse during life without incurring gift tax, under the unlimited marital deduction. Gifts to non-citizen spouses are not fully deductible — a special higher annual exclusion applies (indexed; $185,000 for 2024), but unlimited transfers are not permitted until citizenship is obtained.
The Charitable Deduction
Gifts to qualifying charitable organizations are fully deductible for gift tax purposes, without limit. This effectively allows unlimited tax-free transfers to qualified charities during life — mirroring the estate tax charitable deduction.
Gifts of Future Interests — The Crummey Power
As noted above, the annual exclusion applies only to gifts of present interests. Contributions to most irrevocable trusts would normally be gifts of future interests — ineligible for the annual exclusion — because beneficiaries do not have immediate access to the contributed funds.
The Crummey power (named after the court case Crummey v. Commissioner) is a drafting technique that converts a gift to an irrevocable trust into a present interest gift by giving each beneficiary a temporary right to withdraw their share of the contribution for a limited period (typically 30–60 days). Even though beneficiaries rarely exercise the withdrawal right, its existence satisfies the IRS’s present interest requirement, allowing the contribution to qualify for the annual exclusion.
Gift Tax Rates & the Unified Credit
Taxable gifts in excess of the annual exclusion are subject to gift tax at progressive rates topping out at 40%. However, the federal gift and estate taxes share a single unified credit (also called the applicable exclusion amount). For 2024, this exemption is $13.61 million per person.
Taxable gifts made during life reduce the available unified credit dollar-for-dollar at death. In other words, a donor who makes $1 million in taxable lifetime gifts will have only $12.61 million of estate tax exemption remaining at death (rather than the full $13.61 million).
| Feature | Amount / Rate |
|---|---|
| Annual exclusion (2024) | $18,000 per recipient |
| Non-citizen spouse annual exclusion (2024) | $185,000 |
| Direct tuition / medical exclusion | Unlimited (paid directly to institution) |
| Marital deduction (citizen spouse) | Unlimited |
| Charitable deduction | Unlimited |
| Unified credit exemption (2024) | $13.61 million per person |
| Top gift tax rate | 40% |
Basis Rules for Gifted Property
The income tax basis of gifted property is generally the donor’s original cost basis carried over to the donee (a carryover basis). If the donee later sells the property, any gain above the original cost basis is taxable to the donee at capital gains rates. This is an important consideration when deciding whether to gift appreciated property during life versus holding it until death, where heirs would receive a step-up in basis to fair market value — potentially eliminating the embedded gain entirely.