Gift Tax Rules: How to Gift Money to Family

A married couple helps their adult child make a downpayment on his first home. A woman pays her aging mother’s hospital bills. An older couple passes ownership of the family vacation home to the next generation. A man pays for his adult daughter’s wedding.

Financial support from a loved one can have a big impact on the recipient’s life. It also can lead to some big tax questions for the generous giver, including, Do I need to report this on a gift tax return?…What’s the annual gift tax exclusion?…and How much can you give tax-free?

What Givers Need to Know About Gift Tax

Gift tax is not a concern with most financial gifts. There are no tax consequences as long as the total amount you gift any one person during a year adds up to no more than the annual gift tax exclusion—that is $18,000 in 2024 and will increase to $19,000 in 2025. You can give up to this exclusion amount to as many people as you like in as many years as you like without it creating any tax complications for you or the recipient. It doesn’t matter who the recipients are—the rules are the same whether or not they’re family. Exception: Gift tax limits don’t apply to US citizen spouses—married people usually can give as much as they like to one another without tax consequences. You can gift only $100,000 a year, adjusted for inflation to $185,000 in 2024 (the adjusted amount for 2025 has not yet been announced), to a noncitizen spouse.

Even better: You almost certainly won’t have to pay gift tax even if your gifts exceed the gift tax annual exclusion. Instead, you can subtract the portion that exceeds the exclusion from your federal lifetime estate- and gift tax exemption. In theory, chipping away at this lifetime exemption could later lead to an estate-tax bill for your heirs, but in practice, the lifetime exemption is sufficiently high that the vast majority of families will never face federal estate taxes.

Keep in mind: The lifetime gift tax exemption is slated to drop after 2025, potentially falling from today’s $13.61 million in 2024 to around $7 million in 2026—but that’s still high enough that estate and gift taxes won’t affect most families. Note: If Senator Elizabeth Warren’s tax proposal is enacted, this amount could be reduced to $3.5 million.

Helpful: If your estate might be larger than $7 million, there is a gifting strategy that could lock in today’s historically high exemption—more about this below.

For most people, the main reason to avoid making gifts greater than the annual exclusion isn’t taxes…it’s tax forms. If you exceed the exclusion, you’ll have to complete IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, or pay a tax preparer to do so for you. Form 709 is frustrating and time-consuming—easily adding many hours to your tax-prep time or upward of $1,000 to $5,000 or more to your tax preparer’s bill.

Seven Key Gift Tax Details and Strategies

The following things are worth knowing if you plan to make large gifts to heirs and/or are concerned about future estate taxes, says Bottom Line’s estate-planning expert Martin M. Shenkman, CPA, JD …

 
#1. A multiple-givers/multiple-recipients/multiple-years strategy can keep big gifts below the exclusion limit.

A gift of $18,000 might not be sufficient if you’re trying to help your adult child make a downpayment on his first home in today’s real estate market…or if you’re trying to remove a meaningful amount of money from your future estate.

Good news: There’s a way to increase your gifts to $72,000 a year without exceeding the annual gift tax exclusion, assuming that both you and your adult child are married. How it works: You gift $18,000 to your child and another $18,000 to your child’s spouse…and your spouse does the same—for a total of $72,000. If you did this every year for a decade, you would have shifted $720,000 out of your estate without tax consequences—perhaps even more if you have multiple kids and/or if the annual gift tax exclusion increases to $19,000 in the coming years, as some expect. To do this correctly: Write a separate check for each gift…and the appropriate giver (you or your spouse) should fill out and sign each check. Ideally, your checks should be drawn on an account that’s in your name only and your spouse’s checks should be drawn on an account that’s in her name only—but writing them from a joint account is acceptable if necessary.

Caution: “Gift splitting” rules allow married people to make combined gifts without writing all these separate checks, but when couples make combined gifts in excess of $18,000, they must file Form 709, so writing extra checks is much easier.

Also: Parents who want to increase the amount gifted to an adult child without tax consequences sometimes gift money to that child’s children. That’s allowed, but such gifts truly must be to the grandchild. If money gifted to a young grandchild ends up being used by that grandchild’s parents for the downpayment on a house, for example, the IRS could argue that the money actually was a gift to the grandchild’s parents.
 

 
#2. You can pay someone’s medical or tuition bills without it counting toward your annual gift tax exclusion.

This money must be paid directly to the health-care provider or educational institution. If you give the money directly to a loved one so that he/she can pay his health or school bills, it will count toward first toward your annual gift tax exclusion, and if it is more than that exclusion, then it will reduce your lifetime exemption. Also: Parents and grandparents who want to help a descendant pay future college bills can make up to five years of contributions to a 529 plan in a single year without it counting against their lifetime exemption—at $18,000 a year, that’s a total of as much as $90,000 in a single gift. But those who take advantage of this “superfunding” option must complete Form 709 each year for all five years.
 

 
#3. Loans may end up counting as gifts if IRS rules aren’t carefully followed.

Loans generally don’t have gift tax or estate tax consequences even if they’re larger than $18,000.

But beware—the IRS is wary of gifts masquerading as loans. To be a bona fide loan, there should be a written loan document…interest should be charged—see the applicable federal rates at IRS.gov/applicable-federal-rates to find the minimum loan rates the IRS currently considers acceptable…and the borrower should make required loan payments. (Loans up to $100,000 can be interest free under special conditions. See US Code Section 7872, “Treatment of loans with below-market interest rates.”)

Warning: If you make a loan but don’t want to burden the recipient with loan payments, don’t simply waive future loan payments. Reason: The IRS could argue that the lack of payments means the arrangement was never truly a loan but rather an attempt to disguise a gift. Best: Provide gifts to the borrower to cover the cost of making the loan payments. As long as your gifts to the borrower don’t total more than the annual gift tax exclusion ($18,000 in 2024) in a single year, there won’t be tax consequences. The recipient can then use the gifted funds to make payments to you of interest and principal on the note.
 

 
#4. Gifts to certain spouses do have limits.

Married people typically can gift as much money to their spouses as they like without tax consequences. But if your spouse isn’t a US citizen, then gifts in excess of an annual limit—as of 2024, that limit was $185,000 and expected to be $190,000 in 2025—count against your lifetime estate and gift tax exclusion.
 

 
#5. It’s not just cash gifts that matter.

The value of your noncash gifts counts toward your annual gift tax exclusion and lifetime exemption, too. Valuable noncash gifts including a car, a house or a business, should be professionally appraised—the IRS generally won’t accept other value estimates, such as the original amount paid or the valuation listed on a property tax bill.
 

 
#6. Paying for your adult child’s expensive wedding almost certainly won’t create gift tax issues.

Parents sometimes are warned that they must file Form 709 if the amount they spend on their adult child’s wedding exceeds the annual gift tax exclusion. That almost certainly isn’t necessary—the IRS has not historically pursued parents over wedding costs. If it ever tried to, the parent could argue that the wedding ceremony was not a gift to the bride or groom but rather for the parent’s own benefit…or that it was a gift to the wedding guests and when the cost is divided among those guests, no one received more than $18,000 in value (unless the wedding was really extravagant!).
 

 
#7. Big gifts to heirs or trusts can lock in today’s high lifetime exemption.

Today’s lifetime estate and gift tax exemption is expected to fall from more than $13 million in 2024 and 2025 to approximately $7 million in 2026. If you expect to eventually leave to your heirs an estate worth more than $7 million, making massive gifts to your future heirs before the end of 2025—or to properly constructed trusts benefitting those heirs—could reduce or avoid future gift or estate taxes. The IRS has promised that it won’t “claw back” gift and estate taxes after the exemption is reduced. Example: If you give $13 million to your heirs before the end of 2025, no gift or estate taxes will be due on that gift even if the estate tax is slashed to far less than $13 million before you die. You will, of course, have to file Form 709 if you gift millions of dollars to your heirs. Speak with an estate-planning attorney before making major gifts.