Planning To Give Your Friends Or Family Gifts This Family Season? The Gift Tax Exclusion Makes It Easy
Key Takeaways
- In 2025, individuals can give up to $19,000 per recipient tax-free under the annual gift tax exclusion.
- Certain gifts—like those to a spouse or direct payments for tuition or medical expenses—are generally exempt from the gift tax, regardless of the amount.
Whether you're giving your child cash for a down payment on a home or your best friend a luxury watch this holiday season, the gift tax exclusion allows you to give gifts annually under a certain threshold without incurring tax.
In 2025, an individual can give a gift worth up to $19,000 per person without having to pay taxes on the amount. That means you could gift folks like your cousin, aunt, and childhood friend $19,000 each tax-free.
However, if you decide to gift your cousin more, say $20,000 instead, that additional $1,000 would count toward your lifetime estate tax exemption, which is $13.99 million in 2025.
The estate tax exemption refers to the value of an individual's estate that can be transferred tax-free to heirs at death. In other words, an individual could, upon death, transfer nearly $14 million to their heirs tax-free in 2025.
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That estate tax exemption amount is set to increase next year, too. Due to the "One Big, Beautiful Bill" Act, a tax law signed by President Donald Trump earlier this year, the estate tax exemption will increase to $15 million in 2026.
Using the gift tax exclusion can be a useful strategy for high-net-worth individuals, especially those whose estate might exceed the value of the exemption. These individuals could use the exclusion to reduce the value of their estate while they’re alive.
Here's how it works: the gift giver—not the recipient—is generally responsible for paying federal gift tax. Gift tax rates and individual income tax rates are both progressive, but the rate schedules differ. The federal gift tax rate is 18% to 40%. You'd owe federal gift tax when the total value of gifts you've given during your life tops the lifetime exemption.
Suppose you've made gifts totaling $11 million. Now you want to give a $6 million gift to, let's say, your children. That would put the value of your lifetime gifts at $17 million, which would be $3.01 million over your lifetime exemption. The first $10,000 of that $3.01 million would be taxed at 18%. The next $10,000 would be taxed at 20%. Nine rates would apply successively to additional amounts of the $3.01 million. Finally, amounts equal to and exceeding $1 million would be taxed at 40%.
What You Need To Know
A recent BMO survey of 2,500 people found that the average amount Americans would spend this holiday season was $2,800. Luckily, most gift givers probably won't exceed the annual gift tax exclusion, which is $19,000 per person. Even if givers do surpass the exclusion amount, that additional amount would only reduce their lifetime estate tax exemption, which is a staggering $13.99 million.
Fortunately, some gifts are generally not taxable even if they exceed the annual threshold.
For example, you can typically make tax-free gifts of any amount to your spouse. Plus, if you wanted to pay off a friend or loved one's college tuition or medical bills, those payments would be tax-free as long as you pay the educational institution or healthcare provider directly on behalf of the individual.