The federal gift tax applies when you transfer assets to another person without receiving full value in return. However, the generous annual exclusion and lifetime exemption mean that most gifts never result in actual tax owed. For 2024, you can give up to $17,000 per recipient per year without any tax implications.

Gifts above the annual exclusion count against your unified lifetime exemption, which is shared with the estate tax exemption ($12.92 million for 2024). You must file a gift tax return (Form 709) for gifts exceeding the annual exclusion, but no tax is owed until your cumulative taxable gifts exceed the lifetime exemption. The gift tax rate on amounts above the exemption is 40%.

Strategic gifting is a cornerstone of estate planning. Married couples can combine their annual exclusions to give $34,000 per recipient per year. Gifts to pay tuition or medical expenses directly are unlimited and do not count against the exclusion or exemption. Annual gifting over time can significantly reduce the size of a taxable estate, especially when gifting appreciating assets.