Wealth transfer may be the best way to create your legacy, provide for loved ones, and further charitable objectives. Donating large sums of money or property, though, has unforeseen tax consequences unless you plan carefully. The gift tax is a federal tax on the transfer of property from one person to another without receiving enough consideration in return, and is perhaps the most perplexing segment of the tax code.
Understanding how the tax on gifts works, how the states differ, and how advanced strategies reduce your risk is the key to protecting your assets and your comfort. But how does gift tax work, and how do you comply with the rules? Let us start with the basics.
Understanding the Federal Gift Tax
Most people think of “gift tax” and immediately assume that they will have to pay the IRS if they make gifts or transfers of property. The truth is, though, that most gifts are not actually subject to taxation because of generous federal exclusions and exemptions.
Therefore, how does the federal gift tax work?
To begin with, you can gift up to $19,000 to each recipient per year (through 2025) without using your lifetime exemption. You can double these exclusions if married and gift up to $38,000 per recipient. Gifts in excess of that do need to be reported on Form 709, but you don’t owe tax until you also exceed your lifetime gift tax exemption, which in 2025 is $13.99 million per individual. There’s no limit to the number of recipients you can gift to.
Notably, reporting is complicated. Professional valuation might be necessary for large gifts like business interests or real estate to ascertain their worth. And, if you don’t provide enough disclosure, the IRS can challenge the value of the gift forever. Want to know exactly what adequate disclosure gift tax is? The IRS has the full guidelines here.
And where do advanced planning techniques fit in?
Strategic Gift Tax Planning
While the current lifetime exemption level is high, it is about to expire (and perhaps be reduced by half) in 2026 unless Congress acts. Because of this, rich individuals and business owners are likely to use advanced gift tax planning now to take advantage of beneficial exemptions and provide for future generations.
Among the strongest tools are the use of irrevocable trusts, such as GRATs (Grantor Retained Annuity Trusts) and SLATs (Spousal Lifetime Access Trusts). These allow you to transfer appreciation on assets outside your taxable estate with minimal tax on gift exposure.
One other strategy is valuation discounts for gift taxes, specifically for gifts of minority interests in family FLPs or LLCs. You can decrease the tax value of the gift using lack of control or marketability discounts — a strategy often under attack by the IRS, but very helpful when properly documented.
If you are giving away business property or assets, cost segregation can also recognize assets with shorter depreciable lives, which can reduce gift tax value and future capital gains exposure.
And don’t forget charitable giving: charitable lead or remainder trusts can also reduce taxable estates while advancing philanthropic goals.
Gifting assets expected to appreciate in value, like stocks or real estate, shifts the future appreciation out of your estate and can reduce your overall tax burden.
Take advantage of tax-free educational and medical expense payments – Directly paying for qualified tuition and medical expenses for another individual is completely exempt from gift tax and does not count towards the annual exclusion or lifetime exemption.
So, how does it all tie back to where you live or where your recipients live? That brings us to state laws — which can be incredibly diverse.
Gift Tax Implications by State
Though the federal gift tax provisions apply across the country, states may (and occasionally do) have their own taxes or reporting. Fortunately for most taxpayers, Connecticut is the only state with an active, stand-alone tax on gifts.
Several states, including New York, Massachusetts, and New Jersey, charge estate taxes but do not have separate gift taxes. Other states, like Florida, California, Virginia, Georgia, Tennessee, and many more, do not have a state gift tax.
Here’s a breakdown:
Florida
No state gift tax.
New York
No New York state gift tax; gifts within 3 years of death added back into estate for NY estate tax.
Connecticut
The only state with its own gift tax; annual reporting required if gifts exceed state exclusion thresholds.
Massachusetts
There is no gift tax on Massachusetts gift tax, but lifetime gifts may affect estate tax.
Oregon
No state gift tax; potential estate tax look-back.
North Carolina
Gift tax repealed in 2009.
Michigan
No state gift tax.
Missouri
No state gift tax.
Minnesota
No gift tax, but gifts within 3 years of death included in taxable estate.
Pennsylvania
No gift tax; inheritance tax applies at death.
Virginia
No state gift tax.
New Jersey
No gift tax; inheritance tax on certain transfers at death.
Colorado
No state gift tax.
Arizona
No state gift tax.
Indiana
No state gift tax.
Maryland
No gift tax; inheritance tax applies.
Georgia
No state gift tax.
Tennessee
Gift tax repealed in 2012.
Ohio
Gift tax repealed in 2013.
Arkansas
No gift tax; vehicle transfers may trigger title/fee rules.
California
No state gift tax.
Because laws often change, it’s wise to verify in official sources like the Tax Foundation’s annual state-by-state guide or with a qualified tax advisor before making substantial gifts across state lines.
For up-to-date state-by-state information, consult the IRS discussion of the estate and gift taxes, which explains how certain states apply lifetime gifts in their formula for calculating estate taxes.
Although most states do not tax gifts, gifts will impact state estate tax in the future — another reason gifts need to be coordinated with long-term estate planning.
Gift Tax Considerations for Businesses and Employers
If you are a business owner, you might also want to know how the tax on gifts applies to employee gifts, client gifts, or marketing giveaways. The short answer: to the IRS, these types of gifts sometimes have special rules.
Gifts to employees: Generally treated as taxable wages (subject to payroll taxes) unless they’re truly nominal (holiday turkeys or sporadic small branded knick-knacks come to mind).
Gifts to customers or clients: $25 or less per year per person can be deducted. Gifts above this amount are not generally deductible.
Gift cards: Typically considered cash-equivalent — i.e., taxable to the workers and not deductible as a business gift.
Suppose you gift business property or interests (such as shares in your business) that invoke gifting tax rules like transfers of personal property. A professional appraisal and effective documentation are important here to remain in compliance and not raise flags on future audits.
Filing, Disclosure, and IRS Audit Triggers
Making correct gift tax filings isn’t merely a compliance matter — it’s also your strongest protection against future IRS audits.
You must file Form 709 when you give more than the annual exclusion or gifts of future interest, even though you are not liable for tax. So, when is the gift tax return due date? That’s April 15 of the year after the year of the gift (or October 15 with an extension).
The solution is to make adequate disclosure, which starts the running of the IRS’s three-year statute of limitations. Unreported gifts are subject to audit perpetually. Red flags include large gifts of hard-to-value assets (art, closely held stock, cryptocurrency) and missing or suspicious appraisals.
That’s why hiring an advisor and experienced appraisers is well worth every penny when the IRS is at the door.
When to Work With a Tax Advisor
If you’re giving away real estate, business interests, or assets over and above the annual exclusion — especially if you want to make use of trusts or valuation discounts — you’ll want experienced counsel.
An advisor can help you:
- Determine if a qualified appraisal for gift tax purposes is needed.
- Structure gifts with entities like LLCs or trusts for the best results.
- Operate through adequate disclosure requirements to minimize audit risk.
- Coordinate state and federal planning, especially if you live (or contribute) across state lines.
At Neil Jesani Advisors, we help business owners and high-income earners design smart, proactive strategies to preserve your wealth and your legacy.
Conclusion
Gift tax planning is not necessarily about saving tax now — it’s about making sure your gifts have the desired effect with minimal disruption and maximum impact in the long run. From knowing federal and state regulations to leveraging sophisticated strategies, a good plan can save you time, effort, and money.
If you are thinking of making large gifts, then the time to do so is now. Contact us today to schedule an appointment and learn how we can guide you through every stage of the process with confidence.
