Estate and Gift Tax: IRS Rules and Thresholds
Federal estate and gift taxes impose a unified transfer tax on wealth passed from one person to another, whether at death or during life. This page covers the statutory definitions, current exemption thresholds, the mechanics of how the taxes are calculated and reported, common transfer scenarios, and the decision boundaries that determine when a filing or payment obligation is triggered. These taxes are administered by the IRS under the authority of the Internal Revenue Code and intersect with the federal tax types overview that shapes the broader U.S. tax system.
Definition and scope
Estate tax is imposed on the transfer of a decedent's taxable estate under 26 U.S.C. § 2001. Gift tax is imposed on transfers of property by a living donor under 26 U.S.C. § 2501. The two taxes are unified through a single lifetime exemption — the "basic exclusion amount" — which prevents donors from avoiding estate tax simply by giving away assets before death.
The taxable estate includes virtually all property in which the decedent held an interest at death: real estate, cash, securities, retirement accounts (to the extent includible), business interests, and certain transferred assets over which the decedent retained control. Gifts made during life reduce the same exemption pool. The gift tax annual exclusion — set at $18,000 per recipient for 2024 (IRS Revenue Procedure 2023-34) — operates separately from the lifetime exemption and does not consume it.
The unified credit is the mechanism that shelters transfers up to the basic exclusion amount from tax. For 2024, that amount is $13.61 million per individual (IRS Rev. Proc. 2023-34), meaning a married couple can shield up to $27.22 million in combined transfers through portability elections. Amounts above the threshold are taxed at a top rate of 40 percent (IRC § 2001(c)).
How it works
Estate tax process
- Gross estate calculation: All assets are valued at fair market value on the date of death (or, if elected, the alternate valuation date six months later under IRC § 2032).
- Deductions applied: Allowable deductions — including the marital deduction, charitable deduction, debts, and funeral expenses — are subtracted to arrive at the taxable estate (IRC § 2051).
- Adjusted taxable gifts added: Taxable gifts made after 1976 are added back to the estate base.
- Tentative tax computed: The IRS rate schedule under IRC § 2001(c) is applied to the combined base.
- Unified credit subtracted: The credit equivalent to the basic exclusion amount is subtracted; only the remainder is owed.
- Form 706 filed: IRS Form 706 (United States Estate and Generation-Skipping Transfer Tax Return) is due nine months after the date of death, with a six-month extension available.
Gift tax process
Donors who make taxable gifts — those exceeding the annual exclusion per recipient — report them on IRS Form 709 (United States Gift and Generation-Skipping Transfer Tax Return). Form 709 is due by the donor's individual income tax filing deadline (April 15 of the year following the gift). No tax is actually owed until cumulative lifetime taxable gifts exceed the basic exclusion amount, at which point the 40 percent rate applies to the excess.
Common scenarios
Scenario A — Large estate below the threshold: A decedent dies in 2024 with a gross estate of $10 million. After a $500,000 mortgage deduction, the taxable estate is $9.5 million. Because this falls below the $13.61 million basic exclusion amount, no estate tax is due. Form 706 may still be advisable to preserve portability for a surviving spouse.
Scenario B — Portability election: A surviving spouse can inherit the unused exclusion of a deceased spouse (the Deceased Spousal Unused Exclusion, or DSUE) by timely filing Form 706 and making the portability election under IRC § 2010(c). This doubles the effective exclusion for the surviving spouse's estate.
Scenario C — Annual exclusion gifts: A donor gives $18,000 each to 5 recipients in 2024, totaling $90,000. Because each gift falls within the per-recipient annual exclusion, no Form 709 is required and no lifetime exemption is consumed.
Scenario D — Taxable gift above annual exclusion: A donor gifts $500,000 in cash to a child in 2024. After subtracting the $18,000 annual exclusion, $482,000 is a taxable gift. Form 709 is required. No tax is due immediately; instead, $482,000 is applied against the donor's lifetime exclusion, reducing it from $13.61 million to $13.128 million.
Decision boundaries
The key distinction taxpayers and practitioners must recognize is annual exclusion vs. lifetime exemption:
| Transfer type | Annual exclusion applies? | Reduces lifetime exemption? | Form 709 required? |
|---|---|---|---|
| Gift ≤ $18,000 per recipient (2024) | Yes | No | No |
| Gift > $18,000 per recipient | Partial ($18,000 sheltered) | Yes, for excess | Yes |
| Direct tuition or medical payment | Yes (unlimited, if paid directly to institution) | No | No |
| Marital gift to U.S. citizen spouse | Unlimited marital deduction | No | Generally no |
The sunset provision under the Tax Cuts and Jobs Act of 2017 (Pub. L. 115-97) is a critical boundary: absent congressional action, the basic exclusion amount reverts to approximately $5 million (adjusted for inflation) after December 31, 2025. The IRS issued final regulations under Treasury Decision 9884 confirming that gifts made at the higher exclusion amount before the sunset will not be "clawed back" into the taxable estate — a critical planning boundary for donors considering large transfers before 2026.
Filing thresholds also create a distinct boundary: estates below the basic exclusion amount are not required to file Form 706 unless the executor wishes to claim portability. Failure to file within nine months (plus any extension) permanently forfeits the portability election, as confirmed in Treasury Regulation § 20.2010-2.
For a broader map of IRS authority and the tax system, the irsauthority.com homepage provides orientation across the full scope of federal tax administration.