PAN card correction
How to Make Corrections to Your PAN Card
June 25, 2018
What is Under-reporting and Mis-reporting of Income?
June 25, 2018

IRS Gift Tax Rate – Limit & Exclusion

Last Update Date : April 29, 2019
Estimated Read Time: 7 min

US gift tax

In this article by H&R Block you will find answers to questions like – What is Gift Tax? Do you have to pay taxes on a gift? What are the IRS Gift Tax Rules?

Define Gift as per IRS

Anytime you give cash or make a transfer, where the benefactor of the gift does not return something equal to its value, it is considered a gift by the Internal Revenue Service (IRS).  So, if you give a friend money, and she does not have to pay you back, then it is a gift.  Similarly, if you sell your house valued at $250,000 for only $175,000, then she has received a gift of $75,000 from you, which needs to be declared by the giver, as per U.S. gift tax law.

What is Gift Tax?

The Federal Gift Tax applies to all gifts given by U.S. citizens and residents during his/her lifetime, where the value exceeds the annual exclusion limit of $15,000 for 2018. The tax law came into existence to deter people from gifting their estates before they die, thereby evading taxes.  The gift tax law is applied to the giver and not the recipient.

How much is Gift Tax?

The giver of the gift is liable to pay tax of 18% – 40% on gifts given exceeding the lifetime exclusion limit of $5.49 million per person and the annual exemption limit of $15,000. So, any gifts given during the year under the annual amount, does not need to be reported and this amount will not be deducted from the lifetime exclusion limit.

Gifting Real Estate to Family Members and Estate Tax Rate 2018

A person’s estate is the total net value of all his/her assets.  As per the gift tax rules the first $11.18 million is tax free for 2018.  After this exemption limit, the remaining amount is taxable at the highest rate of 40%.  So, if even if a taxpayer tries to gift his assets slowly to his family, the amount would get deducted from his lifetime exclusion limit.

Federal Gift Tax Rate Table

As you cross your annual and lifetime exemption limits, you will be taxed accordingly as per the rates given below for 2018.

Taxable AmountTax Rate
$10,001 – $20,00020%
$20,001 – $ 40,00022%
$40,001 – $ 60,00024%
$60,001 – $80,00026%
$80,001 – $100,00028%
$100,001 – $150,00030%
$150,001 – $250,00032%
$250,001 – $500,00034%
$500,001 – $750,00037%
$750,001 – 1000,00039%
1,000,001 +40%

How is gift tax calculated?

So, for example, if an individual gifts annually to his children and grandchildren $15,000 repeatedly over a period of time equaling a total of $1,000,000 then he would still have the whole $11.18 million left as his exemption limit on his estate.

Also, if a mother gifts her daughter her house, which was bought at $100,000, but is now valued at $350,000, the tax basis would be $100,000. However, if she were to sell this house the gains would equate to $250,000, which would be liable for capital gains tax.

But if the same house was inherited by the daughter, the tax basis would be $350,000 and if the house is sold for $375,000, then she would only have to capital gains tax on $25,000.

Federal Gift Tax Exemptions

The following do not attract gift tax:

  1. Under the exemption limit – A person can give as many people he/she wants up to $15,000 without triggering the gift tax.
  2. Education Expenses – There is no limit for making payments towards a person’s education, however, the payment must be made directly to the institution and it is only applicable on the tuition fees. To pay for living expenses, books etc., a person can avail of the yearly limit of $15,000.
  3. Spousal Gifts – An individual can gift his/her spouse an unlimited amount without attracting gift tax. However, if the spouse is not an U.S. citizen, then certain exclusions would be applicable.  For gifts to foreign spouses, an annual limit of up to $149,000 exists.
  4. Medical Expenses – Payments made directly to the person in need of the medical treatment are not subject to gift tax. Medical expenses include:
  • Long term medical insurance
  • Diagnostics
  • Treatment of disease
  • Surgeries/procedures involving the functioning of the body
  • Transportation for medical care.

How Does the Lifetime Gift Tax Exemption Work

Your annual exclusion limit is different from your lifetime exemption.  With your annual exemption limit, you can gift each child or family member $15,000 for 2018.  However, if you gift a person $20,000, you can choose to deduct the extra five thousand from your lifetime exclusion limit of $11.18 million or pay tax on the extra $5000.  If you opt to deduct the amount from your lifetime exclusion limit, then you must file IRS form 709, even though you are within your exemption limit. The reason you must file is so that the IRS can keep track of value of the total amount of gifts bequeathed by you.

Rules for Gifting Property Before Death

The easiest way to transfer property is to transfer ownership of your estate to your family member/children by changing the name on the deed.  As transfer of ownership will exceed your annual exclusion limit of $15,000, you can deduct the amount from your lifetime exclusion limit, which is $11.18 million for 2018.  So, for example, you can gift your son your house worth $450,000, which still leaves $10.73 million in your lifetime exclusion limit, which should not be a problem unless, your assets are in excess of this limit.  For amounts exceeding the lifetime limit, tax will be levied to the donor on the amount exceeding the limit (see rate table below).

Reporting Gifts to IRS

If a taxpayer were to gift another person over the annual amount of $15,000, then the amount needs to be reported in the gift tax return IRS Form 709, when filing his/her annual income tax return.

Gift Tax Return Form 709

Click to Download Sample IRS Gift Tax Form

When filing the gift tax return form, the gift giver needs to mention the fair market value of the asset as on the date of the transfer.  The recipient’s name must also be mentioned along with any supporting documents, if the gift is stocks, for example.

[ Read: U.S. Tax Filing Requirements ]

Gift Tax Laws for Expats and Non-Residents

For expats and green card holders, living in other countries, their assets worldwide are subject to the tax laws of the U.S. as well.  So, any gifts given worldwide would be liable to the U.S. gift tax.  The tax implications for this group of taxpayers can be complex, requiring expert assistance when filing annual income tax return.

People Also Ask

Q. Are gifts taxable?

A. Gifts exceeding the annual exclusion limit of $15,000 per person for 2018 is taxable. So, a father can give each child $15,000 and not be liable to gift tax.

Q. What is the annual gift tax exclusion/limit for 2018?

A. The federal estate and gift tax exclusion limit for 2018 is $11,180,000 per person. This is in addition to the annual exemption limit of $15,000 per person.

Q. What is a gift tax return?

A. IRS form 709 is the gift tax return form, which is used to declare gifts made exceeding the annual exemption limit. The gift tax return form is filed with your annual income tax return.

Q. How much can I gift tax free?

A. An individual can gift $15,000 per person for 2018. Married couples can gift $30,000 jointly.

Q. What if I want to gift money to children and family members?

A. You can gift up to $15,000 per family member without attracting gift tax. If you exceed this amount, you can tap into your lifetime exclusion limit of $11.18 million.

Q. Can I deduct gift amount on my tax return?

A. Unless you contribute to recognized charitable organizations, gifts made to family members are not tax deductible.

Q. What is gift transfer tax?

A. Any transfers which take place, where the equal value is not returned, is liable for gift tax laws. So, if a grandfather gifts his grandchild a house valued a $250,000, then the grandfather is liable to gift tax laws and will have to file his gift tax return IRS form 709.

Q. What is a gift fund?

A. A home loan borrower can use gift cash received to fund in part/full the down payment of his/her house from an allowed donor, such as family member, fiancé or domestic partner. A gift letter must also be presented, which states that the amount given is a gift and not a loan, therefore, it does not need to be returned.

Q. Why are gifts taxed?

A. The gift tax came into effect to prevent citizens from giving their money before they die, thereby evading the estate tax.

Q. How to avoid gift tax on real estate?

A. Setting up trusts can help you avoid gift tax on real estate. By setting up a personal residence trust, you can set provisions for who receives the real estate and the time duration/limit when she is eligible to receive it. You can also set up a will so that your family member/child can inherit the estate, provided it is within the lifetime exclusion limit.

How H&R Block Can Help You?

H&R Block is the global leader in the Income Tax filing services domain. Get your U.S. Expat tax filing done by our tax experts who will help you understand your tax modalities, prepare your return and file it online.

How’s your tax refund doing this year? Not sure?

Get a Tax Pro from H&R Block to get you the best refund starting at $75 only
Leave a Rating!
4.9 (18 Votes)
Mohammadfaruq Memon
Mohd. Faruq Memon is the Head of U.S. Expat Tax Services at H&R Block (India) with an industry experience of fifteen years. He holds a masters-level qualification and his expertise lies in Dual Taxation. On weekends, Faruq is a movie buff who also enjoys watching cricket!

Still Have Questions?