Most persons have heard about the “Gift Tax”. But many are largely ignorant of what it is, how it works, and who actually pays it.  Moreover, there are some popular misconceptions surrounding it. Here are some important points to be aware of.

What is it?

A tax is imposed by the federal government upon a “donor” (gift giver) who gifts money or other assets to a “donee” (gift recipient).  For example: if Jack gives Jill $100, Jack incurs a federal gift tax on the $100 gift. It’s taxable at a rate based upon the total amount of gifts Jack made that year. The tax rate is spread across 12 brackets on a sliding scale commencing at 18% for total annual gifts of not more than $10,000, up to 40% for total gifting in a year that exceeds $1,000,000.  But as noted below, there is an annual gift tax exclusion and a lifetime exemption that apply in determining whether and, if so, how much tax must actually be paid. Also be aware, that if parties exchange assets, the person who receives the higher-valued asset makes a gift to the extent of the excess value of one asset over the other. For example, if Jill gives Jack a $75 coat in exchange for $100 from Jack, Jack has made a $25 gift to Jill.

Annual Gift Tax Exclusion

A donor enjoys an annual gift tax exclusion that is indexed for inflation. In 2025 that exclusion is $19,000. This means that any person who gives away $19,000 or less to any one individual(anyone other than their spouse) does not have to report the gift or gifts to the Internal Revenue Services (IRS).  Each donee carries a separate $19,000 gift tax exclusion. If you gift more that $19,000 to any one person this year, you will be obliged to report this gift on IRS Form 709, the gift tax return. But you may choose not to do so if you believe the total amount of taxable gifts (gifts not reduced by the annual gift tax exclusion) will not exceed your Lifetime Gift Tax Exemption, discussed below. If you are wrong about that, you can later file gift tax returns for earlier years.

Lifetime Gift Tax Exemption

The IRS allows you to give away a total of $13.99 million during your lifetime before a gift tax is owed.  The amount of the exclusion is indexed for inflation and therefore subject to increase annually. This amount was $13.61 million in 2024. This $13.99 million exclusion means that even if you are technically required to file a Form 709 if you give away more than $19,000 to any one person this year, you will owe taxes only if you have given away more than a total of $13.99 million in the past.

As a result, the filing of a Form 709 is irrelevant for most people because most people don’t have $13.99 million to give away. Note that the gift tax exclusion is set to be cut in half in 2026

How to Avoid Gift Taxes

For those who have the means, there are several ways to give away more than $13.99 million over a lifetime without owing taxes. Keep in mind that Form 709 is only required when you give away more than the annual exclusion amount.

For example, a married couple with a married child can give away $76,000 in one year without having to report the gift:

Each parent gives the child and the child’s spouse $19,000 each. This is referred to as “gift splitting”. If a couple did this for 25 years, they would have given away $1.9 million without having to pay tax, much less having them count against their lifetime $13.99 million exclusion. It would also be possible for the couple to give away $148,000 within a short span of time — $72,000 in December and $76,000 in January of the next calendar year.

Be aware, however, that when a married couple engages in gift splitting, each spouse must file a separate Form 709.)

The Type of Gift Matters

Another way for a gift to be exempted from reporting requirements, no matter the gift’s size, is to pay for someone else’s medical care or school tuition. The money must be paid directly to the school, university, or health care provider to be exempt. Pre-payments can often be made as soon as the person is admitted to the school (educational institutions include not just colleges but also nursery schools, private grade schools, or private high schools).

However, if you contribute to someone else’s 529 college savings plan, you are subject to the $19,000 gift exclusion rule. A special regulation in the tax code enables a donor to use up five years’ worth of their exclusions and gift $95,000 (in 2025) to a 529 at one time.

Gifts to a Spouse or Charity

Gifts to a spouse are usually not subject to any federal gift taxes as long as your spouse is a citizen of the United States. If your spouse is not a U.S. citizen, you can give only $195,000 without reporting the gift (in 2025). Anything over that amount is a taxable gift and should be reported on Form 709.

If you give away property this year other than money, like stock, you have to report that on your gift return, too, if the value is more than $19,000. If the stock has gone up in value since you bought it, you report the value as of the date that you gave it away.

You should but are not obliged to inform the recipient as to the tax basis of the gifted property. That will ordinarily be the amount that you bought the stock for. This basis carries over to the recipient and is used to determine the profit or loss to the recipient when the property is sold.

Finally, tax-deductible gifts made to charities need not be reported on a gift tax return unless the donor retains some interest in the gifted property.

What About Medicaid

Contrary to what many believe, the gift tax exclusion does NOT apply to Medicaid gifting. In Pennsylvania, total gifts (not per person) in excess of $500 in any one month incur a Medicaid penalty in the form of a period of ineligibility for benefits.

Don’t Forget the Federal Estate Tax

The Lifetime Exemption for Gift Tax is tied to the Federal Estate Tax. Use of the exclusion for gifts reduces the comparable $13.99 million federal estate tax exclusion. For example, notes Stanley Vasiliadis, an attorney with the law firm of Vasiliadis Pappas Associates, “if Jack uses up $10 million of his gift tax exclusion before he dies, then his $13.99 million estate tax exclusion is reduced to $3.99 million. Assets in his estate in excess of $3.99 million will be taxed at 40%”.

Work With an Elder Law/Estate Planning Attorney

The attorneys at Vasiliadis Pappas Associates can provide valuable guidance on navigating gift taxes by helping you understand the rules and regulations that apply to your specific situation. They can assist in determining the fair market value of your gifts, ensuring compliance with tax laws, and advising on strategies to minimize your tax liabilities. In addition, they can help you structure your gifts in a way that maximizes benefits for both you and the recipient, while also addressing any potential future tax implications. Call us. We can help!

Contact Vasiliadis Pappas Associates for expert guidance on gift taxes and estate planning.