Understanding Gift, Estate, and Inheritance Taxes: What to Know

When wealth is transferred—whether during life or after death—there are tax implications that can significantly impact both the giver and the receiver. Three terms that often come up in this context are gift tax, estate tax, and inheritance tax. Although they’re related, each one applies in different ways, at different times, and to different people.

Understanding how these taxes work is essential for effective estate planning, avoiding unintended tax burdens, and making the most of what you give or receive. Here’s a detailed breakdown of what each tax means, who pays it, and how they compare.

What Is a Gift Tax?

The gift tax is a federal tax on the transfer of money or property from one individual to another while receiving nothing (or less than full value) in return. In simple terms, it’s a tax the giver may have to pay when giving a significant gift.

When Does It Apply?

Gift tax applies only if the value of the gift exceeds certain annual and lifetime limits set by the IRS. As of 2024, the annual gift tax exclusion is $17,000 per recipient (or $34,000 for married couples giving jointly). That means you can give up to $17,000 to as many people as you want each year without having to pay gift tax or even file a gift tax return.

If you exceed the annual exclusion, the excess counts against your lifetime exemption—which is $13.61 million in 2024. Only after you’ve used up this lifetime limit would you potentially owe gift tax.

Who Pays the Gift Tax?

The person giving the gift is responsible for paying the tax—not the recipient. However, most people never pay gift tax because of the generous exclusions and exemptions.

Exceptions to the Rule

Some transfers are not subject to gift tax, including:

  • Gifts to your spouse (if a U.S. citizen)

  • Payments made directly to educational institutions for tuition

  • Payments made directly to medical providers for someone’s medical expenses

  • Charitable donations

What Is an Estate Tax?

The estate tax is a tax on the total value of a person’s assets at the time of their death, before those assets are passed on to heirs. It applies only to estates that exceed a certain threshold.

When Does It Apply?

As of 2024, the federal estate tax exemption is also $13.61 million per individual, or $27.22 million for married couples. If an estate’s value is below this threshold, no federal estate tax is owed. If it’s above, only the amount exceeding the exemption is taxed—at rates up to 40%.

Some states also have their own state-level estate taxes, often with much lower exemption thresholds than the federal level. States like Massachusetts and Oregon have exemptions as low as $1 million.

Who Pays the Estate Tax?

The estate itself pays the tax before any assets are distributed to heirs. Beneficiaries typically receive what’s left after the estate tax is paid.

What Is an Inheritance Tax?

Unlike estate and gift taxes, the inheritance tax is paid by the person receiving the inheritance, not the person who gave it (or their estate). This tax is levied on the value of the inheritance received by an individual.

When Does It Apply?

There is no federal inheritance tax. However, six states currently impose inheritance taxes:

  • Iowa (phasing out by 2025)

  • Kentucky

  • Maryland

  • Nebraska

  • New Jersey

  • Pennsylvania

Each state sets its own exemption amounts, tax rates, and rules based on the relationship between the deceased and the beneficiary. In general:

  • Spouses are always exempt.

  • Children and close family members often pay little or nothing.

  • Distant relatives or unrelated heirs are more likely to pay higher rates.

Who Pays the Inheritance Tax?

The beneficiary (the person receiving the inheritance) is responsible for paying any inheritance tax due, based on state law.

Key Differences Between Gift, Estate, and Inheritance Taxes

Now that we’ve covered the basics of each, let’s compare them side by side:

Tax Type Who Pays It When It’s Triggered Federal or State?
Gift Tax The giver of the gift When a gift exceeds annual/lifetime exemption Federal (no state-level gift taxes)
Estate Tax The estate of the deceased Upon death, if estate value exceeds exemption Federal and some states
Inheritance Tax The recipient of the inheritance After death, based on state-specific rules State only (6 states)
Gift_Estate_Inheritance_Tax_Chart

These Taxes Work Together

It’s possible for all three taxes to come into play in certain situations—though this is rare and usually only affects high-net-worth individuals.

For example:

  • A wealthy individual gives their child $1 million during their lifetime: This could trigger gift tax filing and use part of the lifetime exemption.

  • Upon death, the remainder of their estate is valued at $15 million: The amount above the federal exemption could be subject to federal estate tax.

  • If a grandchild in Pennsylvania inherits a portion of the estate: They may owe state inheritance tax, depending on local laws.

Strategies to Minimize Taxes

Whether you’re giving or receiving, here are a few ways to potentially reduce your exposure to these taxes:

1. Make Annual Gifts

Give up to the annual exclusion amount ($17,000 in 2024) to as many people as you’d like to reduce your estate without triggering gift tax reporting.

2. Use the Lifetime Exemption Wisely

High-net-worth individuals can make large lifetime gifts and take advantage of today’s high federal exemption before it potentially drops in the future.

3. Set Up Trusts

Trusts can help manage how assets are distributed and reduce estate size. Some trusts, like irrevocable life insurance trusts (ILITs), remove life insurance from your taxable estate.

4. Move to a Tax-Friendly State

Some states have no estate or inheritance tax. Retiring or establishing residency in these states can save your heirs money.

5. Work with a Professional

Gift and estate planning can be complex, especially with ever-changing tax laws. A financial advisor or estate attorney can help you create a plan tailored to your goals and situation.

Final Thoughts

While most Americans won’t pay federal gift or estate taxes due to generous exemptions, understanding these tax types is still essential—especially if you’re planning to transfer wealth or inherit assets. Whether you’re giving a sizable gift, organizing your estate, or on the receiving end of a loved one’s legacy, knowing the difference between gift, estate, and inheritance taxes ensures you’re informed, prepared, and empowered to make smart financial decisions.