Estate and Gift Tax

Federal Gift Tax Overview

The Federal Gift Tax applies to transfers made during life without adequate compensation.
Federal estate and gift taxes are integrated, meaning one set of rates applies to cumulative transfers made both during life and at death.
The tax is imposed on the person transferring property, not the recipient, although the IRS can collect unpaid taxes from heirs.

Gift and Estate Tax Exemptions

Each taxpayer receives a lifetime exclusion from gift and estate tax, as follows:

Gift and Estate Tax Exemptions

Annual Gift Tax Exclusion

Gift Tax Return Filing Thresholds

These updated figures reflect the latest IRS adjustments for 2025. 

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Income Tax on Inherited Assets

Certain inherited assets may or may not be taxable, based on the type of income received:

Taxable Income:

• Annuities (except decedent’s investment in the contract)
• Investment income received after death
• Employer payments (wages, salaries, bonuses, commissions)
• Installment sales proceeds
• Series EE bond interest accrued before death
• Traditional IRA distributions (except nondeductible contributions)
• Deferred compensation, pension plans, SEP plans, Keoghs
• Accounts receivable

Non-Taxable Income:

• Life insurance proceeds
• Cash, bank accounts, CDs
• Stocks, bonds, mutual funds (stepped-up basis applies)
• Real estate (stepped-up basis applies)
• Vehicles, jewelry, personal property (stepped-up basis applies)
• Roth IRA held for more than five years
• Specific probate estate payments designated in a will

Gift Tax Return Filing (Form 709)

A gift tax return must be filed if gifts exceed the annual exclusion amounts:

• $15,000 (2020–2021)
• $16,000 (2022)
• $17,000 (2023)
• $18,000 (2024)
• $19,000 (2025)

Although tax is calculated, no payment is required unless the taxpayer exceeds their lifetime exclusion.

Each year that a gift tax return is filed, gifts from prior years must be reported, as gift tax is cumulative.

Federal Estate Tax (Form 706)

The Federal Estate Tax applies to property transfers upon death. An estate tax return is required if the total value of the estate plus lifetime taxable gifts exceeds the exclusion amount.

Gross Estate Includes:

• Cash, investments, real estate, vehicles, personal property
• Life insurance proceeds (if policy owned by decedent within three years of death)
• Retirement assets, business interests
• Assets passing through probate and direct inheritance
• Trust assets and partial property interests retained by the decedent

Deductible Expenses:

• Funeral expenses
• Administrative costs
• Debt payments
• Losses
• Charitable donations and spousal transfers (fully deductible)

Gift-Splitting and Marital Deduction

• Married couples can double their annual exclusion by electing gift splitting on Form 709.
• The marital deduction allows tax-free transfers to a spouse, with exceptions:

• Gifts to non-citizen spouses are limited to $15,000 (2020–2021), $16,000 (2022), $17,000 (2023), $18,000 (2024), $19,000 (2025).
• Terminable interests (e.g., life estates, annuities, trust income interests) generally do not qualify.

Qualified Transfers: Tuition & Medical Care

• Direct payments for medical expenses or tuition are not considered taxable gifts.
• Payments must be made directly to the institution or provider, not the recipient.
• Expenses like books, supplies, dormitory fees do not qualify.
• Insurance premiums paid on behalf of another person do qualify.

Charitable Deduction

• The estate and gift tax charitable deduction is unlimited for donations to qualified charities.
• Gifts to lodges, sports organizations, veterans groups, and tribal governments may not qualify.
• Unlike income tax charitable deductions, most foreign charity gifts qualify for estate and gift tax deductions.

For additional details, visit www.irs.gov.