A generous financial gift to a friend or family member or your favorite charity may get you into trouble with the IRS. Understanding the state and federal tax implications for monetary gifts can help you avoid expensive liabilities. Consulting with an attorney familiar with federal and state gift tax rules, annual exclusions, and lifetime exemptions can help you plan your generous giving effectively.
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What Is the Gift Tax?
A gift tax is a specific type of federal tax imposed on the giver of a money gift (giving someone money or property without receiving anything of equal value in return). The recipient does not pay tax on the money or property received, but they may have to pay capital gains tax if they sell the gift for a profit.
Don’t worry. You can still stick a $100 bill in a birthday card or gift a recent graduate a few grand for college without a tax penalty. There is a threshold for gifting before tax is imposed, known as an exemption.
How does the gift tax exemption work?
The IRS permits individuals to gift up to a certain amount per recipient per year without requiring the gift to be reported (and without incurring a gift tax penalty). In 2025, the annual individual gift limit is $19,000 per recipient. Married couples can combine their allotment and gift up to $38,000 per recipient per year. Note that the annual exclusion changes each year.
You can still gift someone more than the annual non-taxed limit, but you, the giver, must report the difference between the annual limit and your gift to the IRS. For example, if you gift your daughter $25,000 in 2025, you must report $6,000 of the gift to the IRS (the difference between the annual allotment and your gift). Depending on the amount, your gift may or may not be subject to tax.
There is also a lifetime exclusion for gift taxes, which also changes each year. The 2025 limit is $13.99 million ($27.98 million for married couples).
Certain monetary gifts are tax-exempt
There’s good news—with savvy gifting strategies, you may easily avoid triggering gift reporting and tax obligations. For example, if you want to pay for your daughter’s college, you still can, without the obligation to report to the IRS. How?
- Direct tuition payments to a university, college, or trade school are tax-exempt (although payments for room and board, i.e., the dorm and meal plan, are not)
- Direct payments to a medical care provider for another person’s healthcare and medical treatments are tax exempt
- Monetary and property gifts to your spouse are unlimited and tax-exempt as long as your spouse is a U.S. citizen (if your spouse is a non-U.S. citizen, there’s a limit; in 2025, it’s $190,000)
- Donations to IRS-recognized charities are tax-deductible and do not count toward your gift tax exemption (annual and lifetime)
Incorporating gifting into your estate planning
While Texas has no state gift tax, you’ll still need to consider any federal gift tax when incorporating strategic gifting into your estate plan. Discussions about gifting often involve financial advisors and tax professionals.
By leveraging direct payments for medical care and tuition, you can help loved ones without impacting your annual gifting allotment. And, you can spread your gifts over multiple years to take advantage of the annual exclusion.
That being said, gifting money or assets effectively still requires thoughtful planning. If you are planning to use strategic gifting as a part of an estate plan or to qualify for Medicaid, it’s best to consult with an attorney as soon as possible.
