As we enter the 2025 holiday season, you are likely making party plans, creating gift lists for family and hoping this might be the year you receive something you truly enjoy. You might be wondering why an accounting firm is writing a blog about gifting. Well, as with many things in life, giving gifts can have tax implications. But do not worry, we will cover the basics of what you need to know about gifting and the related tax rules. This way, you can avoid giving Uncle Sam a gift this holiday season and focus instead on finding the perfect one for that overly complicated relative.
What Is a Gift Under IRS Rules?
In simple terms, the IRS defines a taxable gift as the transfer of any type of property (cash or non-cash) in exchange for little or no consideration, meaning you receive nothing in return. Non-cash gifts, such as financial securities or real estate, are valued at their fair market value at the time they are given.
Does this mean you have to report your birthday or holiday money on your tax return? Good news, the answer is no. Under gift taxation rules, the donor (the person giving the gift), not the donee (the person receiving it), is responsible for any tax liability that may arise. Therefore if you receive a gift you do not owe tax, the donor will owe the tax.
Not all gifts need to be reported. There is an annual gift exclusion amount of $19,000 in 2025 (which remains the same for 2026). This limit represents the maximum an individual can gift without facing potential tax liability and it applies at the donee level rather than the donor level. In other words, one individual can make multiple gifts, up to the limit, to different people without triggering gift tax. Married couples can split gifts between spouses, increasing the annual limit to $38,000 per donee.
Another important point: gift taxation is closely tied to estate taxation upon your passing. Any amount gifted over the annual limit reduces your estate exemption. For 2025, the estate exemption amount is $13.99 million, increasing to $15 million in 2026.
Strategies and Mistakes to Avoid
With these basics in mind, here are some strategies to consider and mistakes to avoid:
- Pay tuition or medical expenses directly. If you are helping someone with school tuition or medical bills, send the payment directly to the educational institution or medical provider. These payments are not considered gifts and do not count toward the annual limit.
- Use gifting to reduce estate tax. Estate taxes are triggered when the total gross value of your estate exceeds the estate exemption amount mentioned earlier. By gifting cash or property to your heirs now, you can reduce the total value of your estate that would otherwise be subject to estate tax, which can be taxed as high as 40%. For reference, the highest individual rate is 37%.
- Be mindful of tax basis. If your assets exceed the estate exemption, it is generally wise to keep gifts at or below the annual limit. However, if your assets do not exceed the exemption, gifting non-cash property may not be advantageous. Why? Because the recipient inherits your tax basis on the asset. If they later sell it, they could owe more tax than if they had inherited the property, which would receive a stepped-up basis equal to its value at the time of your passing.
Bottom Line
This overview should give you a basic understanding of gift taxation in the United States. Keep in mind that gifting rules can become more complex depending on the nature of the gift and everyone’s situation is unique. We encourage you to reach out with any questions you may have. We hope this provides peace of mind this holiday season and wish you and your family a happy holiday!
