Concise Takeaway
The federal gift tax applies to lifetime transfers of property for less than full value. Most gifts are not taxable because of the annual exclusion, unlimited exemptions, and the lifetime applicable exclusion. Form 709 is required for reportable gifts, even when no tax is due.
What Counts as a Gift
A gift occurs when a taxpayer transfers:
- Money
- Property
- Use of property
- Income from property
…without receiving something of equal value in return.
The IRS also treats the following as gifts:
- Sales for less than fair market value
- Interest‑free or below‑market loans
The general rule: all gifts are taxable unless an exception applies.
Nontaxable Gifts
The following are not taxable gifts:
- Gifts up to the annual exclusion (excluding future interests)
- Tuition paid directly to an educational institution
- Medical payments made directly to a provider
- Gifts to a spouse (subject to special rules for non‑U.S. citizen spouses)
- Gifts to political organizations
- Gifts to qualified charities
These transfers do not require Form 709 unless other reportable gifts exist.
Applicable Credit and Applicable Exclusion
Each taxpayer has a lifetime applicable exclusion that shelters taxable gifts and estates.
- The applicable credit offsets gift tax during life.
- Any credit used reduces the credit available for estate tax.
- The exclusion and credit adjust annually for inflation.
If the deceased spouse’s estate elected DSUE portability, the surviving spouse may use the DSUE amount before using their own exclusion.
Annual Exclusion
The annual exclusion applies per donee, per year.
Key rules:
- A taxpayer may give up to the annual exclusion amount to any number of people.
- Married couples may split gifts, allowing up to $38,000 per donee in 2025.
- Gift splitting requires:
- Consent from both spouses
- A separate Form 709 for each spouse
- Completion of the gift‑splitting section
Joint Bank Accounts
A gift placed in a joint account is considered complete when the recipient withdraws funds.
Exemptions and Deductions
Unlimited transfers allowed for:
- Medical exemption — paid directly to provider
- Education exemption — tuition paid directly to school
- Political contributions — to organizations for their own use
Deductions allowed for:
- Marital deduction (subject to limits for non‑citizen spouses; 2025 limit: $190,000)
- Charitable contributions
Charitable gifts must be reported on Form 709 only if the taxpayer is required to file for other gifts.
Gifts of Future Interests
Future interests do not qualify for the annual exclusion.
Examples include:
- Remainder interests
- Certain trust interests
These gifts are always reportable on Form 709.
529 Plan Five‑Year Election
A donor may contribute up to five years of annual exclusions at once:
- Up to $95,000 in 2025
- Up to $190,000 for married couples splitting gifts
The donor elects to spread the gift ratably over five years.
GST Tax on Direct Skips
GST tax applies to lifetime transfers to a skip person:
- Someone two or more generations below the donor
- An unrelated person more than 37.5 years younger
GST tax:
- Has its own lifetime exclusion
- Is reported on Form 709
- Is imposed in addition to gift and estate tax
- Uses a flat 40% rate
When Form 709 Is Required
A gift tax return is required when:
- Gifts to any person exceed the annual exclusion
- Spouses elect to split gifts
- Gifts of future interests are made
- Gifts to a spouse include a terminable interest
- GST tax applies
Form 709 is not required for:
- Direct tuition or medical payments
- Political contributions
- Charitable gifts (unless other reportable gifts exist)
Due Date
Form 709 is due:
- The same day as the individual income tax return (generally April 15)
- Extensions for Form 1040 automatically extend Form 709
Top gift tax rate: 40%
Gift Tax Flow Summary
- Identify whether a transfer is a gift
- Apply annual exclusion
- Apply exemptions and deductions
- Determine taxable gifts
- Apply applicable credit and DSUE
- File Form 709 if required