How Financial Gifts Are Taxed

Kelley S. Daugherty is an attorney in Sophisticated Planning Strategies at Northwestern Mutual.

If you have the means, making financial gifts to your loved ones can allow you to help set them up for success—and enjoy seeing them benefit from your gifts. But as the value of your gifts grows, the IRS may start to show an interest (your state revenue department might, too).

It’s important to understand how gift tax rules work. By arming yourself with a little knowledge and collaborating with an experienced financial professional, you can help minimize gift tax consequences.

What is the federal gift tax?

While each state has its own gift tax rules, we’re going to focus primarily on federal gift tax. Basically, if you give generous gifts, you may owe federal tax.

Gifts include more than just money and things you can put a bow on. In fact, anything that has monetary value is subject to gift tax. That could include:

• Investments
• Life insurance policies
• Annuities
• Real estate
• Fine art
• Cars

For non-cash gifts, gift tax rules apply based on each gift’s fair market value.

6 ways to leverage federal gift tax rules

You can gift up to a certain dollar amount each year to anyone without incurring federal gift tax. It’s all thanks to the annual gift tax exclusion (see more below). So, how much can you gift tax-free? If you’re hoping to gift more than the annual exclusion amount in a given year, there’s a strong chance you can do it without incurring federal gift taxes or impacting your lifetime gift and estate tax exemption.

Here are six simple ways to make financial gifts without incurring federal gift tax:

1. The annual gift tax exclusion

The annual gift tax exclusion is probably the most well-known federal gift tax exclusion. It enables each person to gift up to a certain amount of money (the annual exclusion amount) to any other person in a given year. What’s more, the Internal Revenue Service (IRS) adjusts the annual exclusion amount for inflation annually. The 2024 gift tax exclusion is $18,000, up from $17,000 in 2023.

The annual gift tax exclusion is straightforward. You can make a financial gift to literally any other person up to the annual exclusion amount in a given year, and no further action is required. You won’t have to pay gift tax on the gift you made, and you won’t have to report your gift to the IRS via Form 709 (also known as the gift tax return).

2. Gift splitting

If you are married and want to give someone more than the annual exclusion amount, you can leverage an estate planning tool called “gift splitting.” Remember that each American is entitled to an annual gift tax exclusion. As a couple, you can jointly give up to two times the annual exclusion amount. In 2024, that means married couples can gift up to $36,000 to any one person without federal gift tax consequences.

Let’s say that a spouse makes a gift larger than the individual annual exclusion and wants to apply the other spouse’s exclusion amount. The couple will need to file a gift tax return (IRS Form 709) electing gift splitting.

3. Tuition gift tax exclusion

If your financial gift is for educational purposes, another gifting option is the tuition gift tax exclusion. It allows you to cover the cost of someone else’s tuition without it impacting your ability to make an annual exclusion gift to that person. This isn’t just for college education—everything from preschool to post-secondary school may qualify.

But before you make a tuition gift, you need to know these details:

• The institution must be "an educational organization that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.” In other words, formal instruction must be the organization’s primary focus.
• Payment must be made directly to the school on behalf of the student.
• While there is no cap on the tuition exclusion, the money you pay directly to the school is not refundable.
• You can’t use the tuition gift tax exclusion to pay for room, board, books and other costs, as they are not direct tuition costs.
• If the student you are assisting receives financial aid, your gift may impact their aid package.

Before making a tuition gift, it’s smart to consult with your financial advisor, attorney and/or tax professional to ensure your gift qualifies for the exclusion. And if the student is receiving financial aid, consider reaching out to the institution’s financial aid department to understand the impact, if any, your gift will have on the student’s financial aid award.

4. Accelerated 529 gifting

Accelerated 529 gifting is another option for education-related gifts. This special feature of 529 college savings plans allows you to make up to five years of annual exclusion gifts in one year, as long as the gift is deposited into a 529 account.

In 2024, that means you can contribute up to $90,000 to any person if you’re single (or up to $180,000 if you’re married). To take advantage of the five-year accelerated gifting provision, you’ll need to file a gift tax return with the IRS for the year the contribution was made. And because you are accelerating future annual exclusion gifts, it’s important to remember that other gifts made to this individual during the five-year period may be subject to federal gift tax if those gifts do not otherwise qualify for a gift tax exclusion and you’ve exhausted your lifetime gift and estate tax exemption.

5. Medical gift tax exclusion

There is also a special exclusion if you’re looking to help someone pay for medical expenses. Like the tuition gift tax exclusion, the medical gift tax exclusion is unlimited and has no impact on any annual exclusion gifts for the recipient.

While the rules around what expenses qualify for the medical gift tax exclusion are broad and even enable you to help pay for health insurance premiums and long-term care, there are a few important rules to know:

• The gift cannot pay for costs covered by insurance.
• Generally, this exclusion does not apply to costs for cosmetic surgery.
• Payments must be made directly to the health care provider or health insurer.

If you’d like to make a medical gift tax exclusion gift, reach out to your financial advisor, attorney and/or tax professional to help ensure your gift qualifies for the exclusion.

6. The lifetime gift and estate tax exemption

It may be possible to give even more without owing tax. Every U.S. citizen or resident gets a lifetime exemption amount. This gives you the ability to distribute a certain value of property to others during your lifetime or at death without incurring gift tax or estate tax. It’s important to note that this exemption is a unified exemption—so gifts made using this exemption can impact the total exemption remaining for the property you transfer at death through your estate.

The IRS adjusts the exemption amount annually for inflation. In 2024, it’s $13.61 million for single individuals and $27.22 million for married couples. This means that after exhausting the previously discussed gift tax exclusions, you can still gift up to these limits to any combination of individuals throughout your life without incurring federal gift tax. However, such gifts may reduce your ability to gift or leave property tax-free in the future.

The federal lifetime gift and estate tax exemption affects only people with substantial assets. However, it’s worth mentioning that some important tax provisions are set to expire in 2026. Without congressional intervention, the lifetime gift and estate tax exemption will be reduced by approximately half. But even at that level, the majority of people will likely never be in a situation in which they’ll owe federal gift tax or estate tax.

You may still owe state taxes

While the federal gift tax exemptions are quite high, states may have different rules. Your tax professional should know if you live in a state that levies its own gift tax and, if you do, what steps you can take to help plan for it.

Frequently asked questions about financial gift tax

Do you have to pay taxes on money gifted to you?

In most cases, no. The donor, not the receiver of the gift, is typically responsible for paying the gift tax. But if a gift you receive later produces income, like interest or dividends, you can expect to be taxed on that income. 

How does the IRS know if I give a gift?

If you give beyond the annual gift tax limit, which is $18,000 in 2024, you’re required to file a gift tax return. The difference between the annual gift tax limit and what you’ve given will be subtracted from your lifetime gift tax exemption. That’s $13.61 million in 2024.

How do I avoid gift tax?

Leveraging certain tax exclusions and gift splitting with your spouse can help you avoid gift tax. A skilled financial advisor can walk you through different strategies to help you save on taxes while gifting money to those you love.

How can I gift strategically to meet my goals?

Whether you are planning to make a one-time gift or embark on a years-long journey of gifting to your loved ones, it’s important to consider how you can minimize gift tax consequences—and how your gifts will impact your overall financial picture. That’s where the help of your Northwestern Mutual financial advisor comes in. Together, you can identify an effective gifting strategy that meets your long-term financial and life goals.

This publication is not intended as legal or tax advice. Consult with a tax professional for tax advice that is specific to your situation.