Paying Taxes on Gifts: Who Owes, When You File, and Why the Rules Exist

Giving money or property for less than full consideration is a “gift” under federal law, and certain gifts trigger reporting (and rarely, tax) for the person making the transfer. The gift tax is part of a unified transfer tax system designed to tax large wealth transfers made during life and at death in a coordinated way, preventing avoidance by shifting transfers outside the estate tax base. In short, lifetime taxable gifts reduce the exclusion available at death, and the estate tax calculation later takes account of those gifts to ensure coherence across the system IRC § 2501; IRC § 2001.

Who pays the gift tax (and who doesn’t)

• The donor is responsible for the federal gift tax, not the recipient. Regulations make clear the tax applies to transfers by gift of property made by a citizen or resident, subject to exclusions and deductions; the donee does not report the gift as income for federal tax purposes Treas. Reg. § 25.2501-1.

• The tax applies broadly to direct or indirect transfers of real or personal, tangible or intangible property. Congress framed the gift tax to reach transfers “in trust or otherwise,” whether direct or indirect, by residents or nonresidents (with special situs rules for nonresidents), so the substance of a transfer controls regardless of form IRC § 2511.

• In practice, most donors never pay out-of-pocket gift tax due to the annual exclusion and the lifetime unified credit, which offsets gift tax up to an amount tied to the estate tax credit in § 2010 and implemented for gifts by § 2505 and its regulations IRC § 2505; Treas. Reg. § 25.2505-1.

What counts as a “gift”

A gift generally occurs when property is transferred for less than full and adequate consideration. Statutory and regulatory definitions reach transfers in trust or otherwise, whether direct or indirect, and include present and future interests (with filing consequences). Nonresident donors have special situs rules for what is treated as U.S. property for gift tax purposes, particularly for intangibles, but the core definition remains centered on transfers for less than full value IRC § 2511; Treas. Reg. § 25.2511-3.

Annual exclusion amounts (and how they work)

• The annual exclusion lets you give up to a specified amount per recipient per year (for “present interests”) without using lifetime credit or requiring tax payment. Statute sets a $10,000 base indexed for inflation; the current amounts are $18,000 for 2024 and $19,000 for 2025 per donee (and can be doubled with gift-splitting; see below). IRS guidance lists the adjusted annual amounts in the yearly revenue procedure and in operational manuals reflecting 2024–2025 limits Rev. Proc. 2024‑40 (Section 2.43); IRM ts‑21‑1124‑1129 (11/13/2024), 529 contribution note showing 2025 $19,000 and 2024 $18,000 annual exclusion.

• Statutory authority and definitions for the annual exclusion reside in § 2503(b) and its regulations. Gifts of future interests do not qualify for the annual exclusion, and gifts must be evaluated per donee per year IRC § 2503; Treas. Reg. § 25.2503-1; Treas. Reg. § 25.2503-2.

Special exclusions: Tuition and medical payments

Tuition paid directly to a qualifying educational organization and qualifying medical payments made directly to the provider are excluded from gift tax, regardless of amount. This exclusion applies in addition to the annual exclusion, provided payments meet the direct-payment and qualifying-expense requirements set forth in § 2503(e) and its regulations IRC § 2503; Treas. Reg. § 25.2503-6.

Gift-splitting for married couples

Married couples can elect to “split” gifts so that all gifts made by either spouse during the year are treated as made one-half by each spouse, effectively doubling the annual exclusion per donee and optimizing use of the lifetime credit. Gift-splitting requires filing a gift tax return and mutual consent; regulatory guidance explains manner, time, and consent mechanics, including joint and several liability for tax once consent is made IRC § 2513; Treas. Reg. § 25.2513-1; Treas. Reg. § 25.2513-2; Treas. Reg. § 25.2513-4.

When you must file a gift tax return (Form 709)

• You must file a gift tax return if you make any transfer by gift other than those fully covered by the annual exclusion, marital deduction, or charitable deduction, as outlined by § 6019. Common triggers include: gifts exceeding the annual exclusion to a donee, split-gift elections, gifts of future interests, and gifts requiring allocation of GST exemption (where applicable) IRC § 6019.

• The filing deadline is April 15 following the close of the calendar year of the gift. If you receive an extension for your individual income tax return, it automatically extends the gift tax return; a separate automatic 6‑month extension is also available by application (Form 8892), though extension does not extend time to pay tax IRC § 6075(b); Treas. Reg. § 25.6081-1.

• Returns are filed with the appropriate IRS service center; regulations provide filing locations for residents and nonresidents (including Philadelphia for certain nonresident filers) Treas. Reg. § 25.6091-1.

How the tax is computed and the role of the unified credit

• Gift tax is computed under § 2502, which references the estate tax rate schedule to produce a tentative tax on cumulative taxable gifts and then offsets tax due using the unified credit from § 2505. Regulations implement coordination with § 2010(c) for the applicable credit amount and define how prior period gifts are reconciled at current rates IRC § 2502; IRC § 2505; Treas. Reg. § 25.2505-1.

• The unified gift/estate credit is “use‑it‑or‑reduce‑it”: lifetime taxable gifts reduce the credit available later. Reporting all taxable gifts (even when no tax is due) is essential to preserve accurate lifetime credit usage and to facilitate estate tax reconciliation at death IRC § 2505; Treas. Reg. § 25.2505-1.

How lifetime gifts tie into estate tax later

The transfer tax system is unified. At death, the estate tax base includes the taxable estate plus “adjusted taxable gifts” made after 1976 (other than those already includible in the estate). The tentative estate tax is computed on that sum, and then reduced by the aggregate gift taxes that would have been payable at current rates, ensuring lifetime transfers are properly coordinated with estate tax and aligned to the current rate schedule IRC § 2001; Instructions for Form 706 (09/2025).

Basis rules for recipients of gifted property

Recipients don’t pay gift tax or report gifts as income, but basis matters when the property is later sold. Generally, the donee’s basis is the donor’s adjusted basis (carryover basis), with special rules if the fair market value at the time of the gift is less than the donor’s basis (to prevent artificial losses). Publication 551 explains basis for gifted property, adjustments for improvements, and the effect of gift tax paid by the donor (which can increase basis proportional to net appreciation) Publication 551 (Rev. December 2024).

Valuation and documentation best practices

• For significant gifts of property (especially real estate or closely held interests), donors should secure defensible valuations using recognized methods (market/sales comparison, income, and cost approaches), maintain detailed workpapers, and document assumptions and comparable data. IRS valuation guidance outlines what examiners look for and is a practical roadmap for taxpayers and appraisers to produce supportable valuations IRM 4.48.6 Real Property Valuation Guidelines.

• Publication 561 provides general valuation principles for donated property to charities (distinct from gifts to individuals), but its fair market value concepts, comparable sales analysis, and appraisal expectations are useful for building valuation rigor that also translates to gift reporting contexts Publication 561 (12/2024).

Special situations: Nonresident donors and intangibles

Nonresident donors have special rules defining which property is considered situated within the United States for gift tax purposes. In particular, certain shares of stock in U.S. corporations and debt obligations may be treated as U.S. situs property for nonresident donors, while other intangibles may be excluded. Statute and regulations define these situs rules for real, tangible, and intangible property, including exceptions for expatriates under § 2501(a)(3) IRC § 2511; Treas. Reg. § 25.2511-3; IRC § 2501; Treas. Reg. § 25.2501-1.

Practical filing checklist

• Confirm whether a gift tax return is required under § 6019 (e.g., the gift exceeded the annual exclusion per recipient, you elected gift splitting, or the gift was a future interest) and file by April 15 of the following year; apply for an automatic 6‑month extension if needed (no extension for payment) IRC § 6019; IRC § 6075; Treas. Reg. § 25.6081-1.

• Use the correct filing location under § 25.6091‑1 and keep a copy of your return with valuation backup and records of prior gifts to ensure proper lifetime credit tracking Treas. Reg. § 25.6091-1.

• Track current annual exclusion amounts using the IRS’s annual inflation revenue procedure and operational guidance; for 2024 the exclusion is $18,000 per donee and for 2025 it is $19,000 per donee Rev. Proc. 2024‑40; IRM ts‑21‑1124‑1129.

Key takeaways

• Donors—not recipients—bear responsibility for gift tax reporting and potential tax, and the tax applies to transfers by gift of property by citizens or residents, subject to exclusions and deductions Treas. Reg. § 25.2501-1.

• File Form 709 by April 15 of the year after the gift when triggers under § 6019 apply (e.g., gifts above the annual exclusion, split-gift elections, or future-interest gifts), and consider automatic extension options under § 25.6081‑1 IRC § 6019; IRC § 6075; Treas. Reg. § 25.6081-1.

• Annual exclusion amounts are per recipient and indexed; for 2024 it is $18,000 and for 2025 it is $19,000 (which can be doubled with gift-splitting). Verify amounts in the annual revenue procedure and operational guidance Rev. Proc. 2024‑40; IRM ts‑21‑1124‑1129.

• Lifetime taxable gifts and the estate tax are unified; adjusted taxable gifts factor into the estate tax computation, and the unified credit coordinates across lifetime and death transfers IRC § 2001; Treas. Reg. § 25.2505-1.

• Basis for gifted property generally “carries over” from the donor, with special rules if FMV at the date of gift is lower than donor’s basis; recipients should secure records of donor basis and improvements for future sales Publication 551 (Rev. December 2024).

• For property gifts, build defensible valuations and retain documentation; IRS guidance outlines the accepted valuation approaches and documentation standards IRM 4.48.6 Real Property Valuation Guidelines; Publication 561 (12/2024).

By understanding who owes, when you must file, and why the rules exist, you can plan tax-efficient gifts, avoid surprises, and ensure recipients have the records they’ll need to determine basis and calculate gain or loss in the future IRC § 2501; IRC § 6019; Publication 551 (Rev. December 2024).