How the Gift Tax Works: Annual Exclusion and Exemption

The gift tax confuses people because the headline number ($19,000) sounds like a cap on generosity. It isn't.

The federal gift tax works like this: in 2026 you can give up to $19,000 to each person without reporting it. Anything above that per-person amount is reported on Form 709 and subtracted from a $15 million lifetime exemption you share with your estate. You pay gift tax, at 40%, only after your lifetime taxable gifts exceed $15 million. The giver owes any tax, not the recipient.

To run your own numbers, use the gift tax calculator.

What does the IRS count as a gift?

A gift is any transfer where you don't get full value back. That includes more than writing a check:

• Cash or a check to a relative or friend.
• Property sold below market value. Selling a $400,000 house to your son for $250,000 is a $150,000 gift.
• Adding someone to a deed or a brokerage account as a joint owner (for bank accounts, the gift happens when the other person withdraws money).
• Forgiving a debt. Canceling $30,000 your sister owes you is a $30,000 gift.
• Interest-free or below-market loans. The interest you don't charge can be a gift. Loans of $10,000 or less between individuals are generally ignored, as long as the money isn't used to buy income-producing assets.
• Paying someone else's bills, such as a grown child's rent or credit card.

What matters is value, not intent. A "loan" with no paperwork and no repayment is likely to be treated as a gift. If you want a family loan to stay a loan, sign a promissory note, set a repayment schedule, and charge at least the IRS applicable federal rate for the loan's term.

The annual exclusion: $19,000 per recipient

The annual exclusion is $19,000 per recipient for 2026 and the same as in 2025, according to the IRS estate and gift tax updates. Key rules:

• It's per recipient, so you can give $19,000 to each of 10 people ($190,000 total) with no paperwork.
• It's per donor. Your spouse has their own $19,000 for the same person.
• It resets each January 1 and doesn't carry over.
• It applies only to present-interest gifts, where the recipient can use the property now. A gift to a trust that the beneficiary can't touch is a future interest and doesn't qualify, unless the trust gives the beneficiary a temporary withdrawal right (a "Crummey" power).

Timing tip: a gift of $19,000 on December 31 and another $19,000 on January 2 uses two years' exclusions in three days.

Transfers that aren't taxable gifts at all

Some transfers sit entirely outside the gift tax and don't use the exclusion or the exemption:

Example: a grandmother pays her grandson's $42,000 tuition directly to his university and also gives him $19,000 in cash. Nothing is reportable. If she had given him $61,000 to pay the tuition himself, $42,000 would be a taxable gift requiring Form 709.

The lifetime exemption: $15 million

Taxable gifts, the amounts above the annual exclusion, are subtracted from your basic exclusion amount, which the One Big Beautiful Bill Act set at $15,000,000 for 2026 and indexed for inflation after that. It's unified with the estate tax, so whatever you use during life is unavailable at death.

Example: you give your son $100,000 in 2026.

• Annual exclusion: $19,000
• Taxable gift: $81,000
• Gift tax due: $0
• Remaining exemption: $15,000,000 − $81,000 = $14,919,000
• Form 709: required

Married couples effectively have $30 million between them, and portability can carry a deceased spouse's unused exemption to the survivor if the executor files Form 706.

Gift splitting for married couples

If one spouse makes a gift from their own money, both spouses can elect on Form 709 to treat it as made half by each. That doubles the exclusion to $38,000 per recipient.

Example: parents give their daughter $200,000 toward a house from one spouse's account and elect gift splitting.

• Each spouse is treated as giving $100,000
• Each spouse's taxable gift: $100,000 − $19,000 = $81,000
• Both file Form 709; total exemption used: $162,000, split evenly
• Gift tax: $0

The election covers every gift either spouse makes to anyone that year, not just one gift. You must be married at the time of the gift, and the consenting spouse signs the return.

Form 709 in plain terms

You file Form 709 for any year in which you give one person more than $19,000, make a gift of a future interest, elect gift splitting, or elect five-year treatment for a 529 contribution. The 2026 return is due April 15, 2027. An income tax extension also extends Form 709, but any tax owed is due in April.

Most filers owe nothing. The form's job is to keep a running total of exemption used. Keep every Form 709 you file; your executor will need the total when your estate is settled.

Basis: the hidden cost of giving appreciated assets

Gift tax is only half the analysis. The other half is what happens when the recipient sells.

• Gifts keep your basis. If you bought stock for $20,000 and give it to your daughter when it's worth $120,000, her basis is generally $20,000. If she sells, she reports a $100,000 gain.
• Inherited assets usually get a step-up. If she inherits the same stock at your death when it's worth $120,000, her basis becomes $120,000, and an immediate sale produces no gain.

At a 15% long-term capital gains rate, that's $15,000 of tax that could have been avoided. Planning rules of thumb:

• Give cash or high-basis assets during life.
• Hold low-basis, highly appreciated assets until death, unless you need them out of a taxable estate.
• If a gifted asset has a loss (value below your basis), sell it yourself and give the cash. A recipient can't use your loss.

The capital gains calculator shows what a recipient would owe on a sale with your carryover basis.

Gifts close to death

The federal estate tax adds back very few lifetime gifts, but there are exceptions:

• Life insurance transferred within three years of death is pulled back into the estate.
• Gift tax paid on gifts made within three years of death is added to the estate, so "deathbed" taxable gifts don't save the tax on the tax.
• State rules differ. Connecticut is the only state with a separate gift tax. Several states with estate taxes, including New York and Minnesota, add certain taxable gifts made within a few years of death back into the state taxable estate.

For how state estate and inheritance taxes differ by who pays, see inheritance tax vs. estate tax.

Giving to children and grandchildren

Custodial (UTMA/UGMA) accounts. Gifts qualify for the annual exclusion. The child takes control at the state's age of termination, usually 18 or 21.

529 plans. Contributions qualify for the annual exclusion, and you can elect to spread a lump sum over five years: up to $95,000 per beneficiary in 2026, or $190,000 for a couple. Compare the two in the 529 vs. UTMA calculator.

Grandchildren and the GST tax. Gifts that skip a generation can also trigger the generation-skipping transfer tax. The GST exemption matches the $15 million basic exclusion, and annual-exclusion gifts made outright to a grandchild generally don't use it.

A 10-year giving plan without Form 709

Staying inside the annual exclusion moves large amounts out of an estate without paperwork:

If both parents give from their own accounts, no gift-splitting election (and no Form 709) is needed. These totals don't count growth: assets given away early also remove their future appreciation from the estate.

Is the gift tax worth worrying about?

With a $15 million exemption per person, most families will never pay it. The rules still matter because Form 709 must be filed for larger gifts, because gifted assets carry your tax basis, and because a few states tax estates at much lower thresholds than the federal government. If your net worth is near the exemption, model the combined effect in the estate tax calculator and read estate tax planning strategies.