There is a lot of confusion about gifts and taxes.
I get questions like, “My mom gave me $5,000 as a 21st birthday gift. Do I have to pay any gift taxes?”
I want to clarify this confusion around gift taxes in this newsletter.
What is a taxable gift?
In general, every gift is a taxable gift. However, there are some exceptions:
- Gifts that are below the annual exclusion are not taxable.
- Tuition or medical expenses you pay for someone are not taxable.
- Gifts to a U.S. citizen spouse are not taxable.
- Gifts to a political organization for its use are not taxable.
Now, that very first exception is extremely important.
The annual exclusion amount in 2025 is $19,000 ($38,000 for married couples). This annual exclusion applies per individual, which means that you can give a lot more to multiple people.
What happens when it’s more?
Now, just because you gift someone $30,000, it doesn’t mean that you will have to pay any tax on it. This is because the IRS has a lifetime exemption for the total amount you can gift before you have to pay any taxes.
This amount is $13.99 million in 2025 (this exemption is the same exemption that applies to estate taxes). All you would have to do is file the gift tax return.
Quick example:
You gift your parent $30,000 in 2025. Since the amount is over $19,000, you will need to file a gift tax return (Form 709). The $13.99 million exemption will be reduced by the $11,000 (the amount over the exemption), and no taxes will be due on the gift.
What if you already used the $13.99 million exemption? You will have to pay taxes.
These are the tax rates:
The rates are progressive, just like income taxes are.
How will they ever find out?
In our example, you gift $30,000 to a parent. You are required to file a tax return, but how will the IRS ever find out you gifted the money?
That’s a good question.
The IRS struggles with this one due to noncompliance.
One time, the IRS analyzed real estate records and found that between 60-90% of taxpayers who transferred real estate to a relative didn’t actually file a gift tax return.
With things like real estate, it’s easy to track. The IRS can tap into publicly available data, but it is much harder to do so with cash or bank transfers, unless you get audited.
Who pays?
The tax return and/or the tax payment for the gift is the responsibility of the person doing the gifting, not the receiver. Note that sometimes, special arrangements can be made such that the recipient may agree to pay the tax instead of the donor.
What’s the point of gift tax?
This is a fair question, actually. Most people will never have to pay any gift taxes or estate taxes due to the $14 million exclusion. However, it was created to prevent wealthy families from avoiding estate taxes by just giving assets away to their heirs during their lifetime.
One strategy, though, that I see often is that married wealthy families would gift up to the limit to their kids, grandkids, etc., to reduce the size of their estate and lower potentially future estate taxes, while not having to file the tax return.
Any questions? You can just reply back.
Chat next Saturday.
MC, CPA