Gift Taxes – What are They and What are the Limits?

While uncommon, federal gift taxes can present a major financial burden for certain high-wealth givers. Understanding how these taxes work and how to best transfer assets on a year-by-year basis is an essential tool for individuals planning to distribute high-value assets to family, friends, and organizations.

Key Takeaways

• The federal gift tax is rarely applied and primarily pertains to exceptionally wealthy individuals.
• Any person can give money and property valued at $19,000 or less to as many different people as they’d like during any particular tax year.
• Any gift value exceeding the annual limit is added to the lifetime exemption tally, which must remain below $15 million to avoid the federal gift tax.
• There are many exemptions for certain types of giving or particular recipients of gifts exceeding these limitations.

What Is a Gift Tax?

A gift tax is a special tax paid on large distributions of money or property to others for which the giver is either not compensated or receives compensation significantly lower than the value of the gift.

These taxes apply only to particularly large gifts, and many exemptions are available for the most common forms of gifts. Generally speaking, paying gift taxes is uncommon and can be avoided in most scenarios.

What is Considered a Taxable Gift?

There are two main considerations when determining if a gift must be taxed—annual giving limits and lifetime gift exemptions.

Annual Gift Limits

The federal gift tax applies to gifts exceeding $19,000 per year. This cap is per person, meaning one individual can give up to $19,000 to as many other individuals as they wish without incurring any gift tax.

Lifetime Gift Exemption Limit

If a person gives gifts in excess of the $ 19,000-per-person limit, the excess begins to chip away at the lifetime gift exemption (currently set at $15 million). If the lifetime cumulative value of gifts given in excess of the annual limit reaches this threshold, the giver will be assessed a gift tax.

Suppose, for instance, an individual gives out $50,000 to each of 100 people in the year 2026. While all 100 gifts are in excess of the $19,000 annual limit, no gift taxes are assessed for that year, assuming they have not exceeded the $15 million overage threshold in years past. 

Instead, the annual limit of $19,000 is subtracted from each gift, and the remaining $31,000 of each gift is deducted from the lifetime exemption limit. This reduces the lifetime exemption pool by $3.1 million.

If they repeat this process for the next five years, at the end of the fifth year they will have depleted their lifetime gift exemption cap with five consecutive years of $3.1 million gift excess, bringing their lifetime total to $15.5 million. The $500,000 over the lifetime gift exemption is eligible for a gift tax, and any overages in the following years will also be eligible for taxation.

What isn’t Considered a Taxable Gift?

In addition to the annual and lifetime gifting exemptions, there are several common exemptions for certain types of gifts and gifts to particular individuals which can help circumvent the gift tax. Some of the most common exemptions include:

• Gifts to spouses who are United States citizens
• Gifts to IRS-approved nonprofits and charities
• Gifts to political organizations
• Payments made directly to qualifying educational institutions
• Payments made directly to healthcare providers

Gift Tax Rate 

In the event that you exhaust your annual and lifetime gift-giving exemptions, the tax rate on excess gifts ranges from 18% to 40% depending on how much your gifts exceed the exemption limits. The following tax rates apply to gift overages of the given amounts:

Lifetime Gift Excess	Tax Rate
<$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-$1,000,000	39%
>$1,000,000	40%

Gift Tax vs. Inheritance Tax

While gift taxes are assessed on transfers of property from one living person to another, inheritance and estate taxes are assessed when a person’s estate is distributed to their beneficiaries after the property owner’s death.

There is no federal inheritance tax, but a federal estate tax is imposed on estates valued at $15 million or more. There are also many states with their own estate and inheritance taxes that may apply to smaller estates.

While some individuals with large pools of assets may need to navigate gift, estate, and inheritance taxes as part of their retirement and estate planning, it’s important to recognize the distinctions between the two and discuss how to plan accordingly with a qualified financial advisor.

Bottom Line

While most people will not need to navigate the gift tax process, those wishing to transfer large amounts of property or liquid assets should make sure they’re taking all the necessary steps to reduce their associated tax burden. With a 40 percent maximum tax rate on excess gift giving, it pays off to give gifts in a sensible way.

If you need help understanding the best way to transfer your assets, Horizons Wealth Management can help you navigate all the financial questions and set a reasonable strategy. 

Gift Tax FAQ