To calculate gift tax, take the fair market value of what you gave on the date of transfer, subtract the $19,000 annual exclusion for each recipient, and apply anything left over against your $15,000,000 lifetime exemption. You only write a check to the IRS after that lifetime exemption is exhausted.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Almost no one ends up owing cash. Many people do, however, need to file a return so the IRS can track how much of the lifetime exemption they have used.
Who Actually Pays the Tax
The donor pays gift tax, not the recipient. If your mother signs over the title to her house, she is the one who may need to file a gift tax return; you owe nothing to the IRS on the transfer, and you owe no income tax on it either.2Internal Revenue Service. Gifts and Inheritances
Gift tax and estate tax share a single “unified” exemption. Every dollar you use to shelter lifetime gifts reduces the amount that will shelter your estate at death. That is why the calculation tracks a running lifetime total rather than resetting each year.
Step 1: Find the Fair Market Value
Every calculation starts with fair market value on the date of the gift — the price a willing buyer would pay a willing seller when neither is under pressure. For cash, that is simply the dollar amount. For publicly traded stock, the IRS uses the average of the highest and lowest selling prices on the transfer date.
Real estate and closely held business interests generally require a professional appraisal. For gifts of partnership interests, LLC units, or minority shares in a private company, the fair market value may be lower than the proportional share of total assets because a buyer would pay less for an interest they cannot easily sell or control. These marketability and minority-interest discounts can meaningfully reduce a gift’s taxable value, but they need a qualified appraisal to hold up.
Fair market value is not the same as your original purchase price. Cost basis matters when the recipient eventually sells the property and calculates capital gains, but it plays no role in the gift tax math. Keep your appraisals, market data, and any supporting records; the IRS expects objective evidence behind every number.
Step 2: Subtract the Annual Exclusion
The annual exclusion lets you give up to $19,000 per recipient in a calendar year with no reporting required. There is no limit on how many recipients you can give to. Ten grandchildren, $19,000 each, $190,000 total, zero forms.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
The exclusion only covers gifts of a “present interest,” meaning the recipient can use or enjoy the gift right away. Gifts of future interests, where the recipient cannot access the asset until some later date, do not qualify and must be reported in full.3Office of the Law Revision Counsel. 26 USC 2503 – Taxable Gifts
Step 3: Apply the Lifetime Exemption
Anything above the $19,000 annual exclusion is a “taxable gift,” but that phrase is misleading. The excess does not trigger a tax bill. It reduces your lifetime exemption, which for 2026 sits at $15,000,000 per person after the increase enacted by the One, Big, Beautiful Bill Act signed on July 4, 2025.4Internal Revenue Service. What’s New – Estate and Gift Tax The unified credit against gift tax reflects this exemption on the return itself.5Office of the Law Revision Counsel. 26 USC 2505 – Unified Credit Against Gift Tax
You only pay cash tax once your cumulative lifetime taxable gifts cross the $15,000,000 line.
A Worked Example
Say you give your niece $100,000 in 2026. The first $19,000 is covered by the annual exclusion. That leaves $81,000 as a taxable gift. The $81,000 comes off your $15,000,000 lifetime exemption, leaving $14,919,000 for future gifts and your eventual estate. You owe no tax. You do file Form 709 so the IRS can log the running total.
Gift Splitting Doubles the Exclusion for Married Couples
Married couples can elect to treat every gift made by either spouse as if each spouse gave half. That doubles the annual exclusion to $38,000 per recipient without touching either spouse’s lifetime exemption.6Internal Revenue Service. Instructions for Form 709 (2025)
Two conditions must hold when the gift is made: you were married, and neither spouse was a nonresident noncitizen. If you divorced or were widowed later in the year, you can still split the gift as long as neither of you remarried before the calendar year ended. Both spouses generally file their own Form 709 (there is no joint gift tax return), and the consenting spouse signs a notice of consent attached to the donor’s return.6Internal Revenue Service. Instructions for Form 709 (2025)
The election is all or nothing for the year. You cannot pick which gifts to split, and both spouses become jointly and severally liable for each other’s gift tax for that calendar year.
Transfers That Never Enter the Calculation
Some categories of transfer are excluded entirely, no matter how large. They do not eat into your annual exclusion or your lifetime exemption, and they do not require a return.
- Gifts to a U.S. citizen spouse are unlimited under the marital deduction.7Office of the Law Revision Counsel. 26 U.S. Code 2523 – Gift to Spouse
- Gifts to a non-citizen spouse are not unlimited, but a special annual exclusion of $194,000 applies for 2026.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
- Gifts to qualifying charities, religious organizations, and government entities are fully deductible with no cap.8Office of the Law Revision Counsel. 26 U.S. Code 2522 – Charitable and Similar Gifts
- Tuition paid directly to a school is exempt with no dollar limit. Only tuition qualifies, not room, board, books, or supplies.3Office of the Law Revision Counsel. 26 USC 2503 – Taxable Gifts
- Medical expenses paid directly to a hospital, doctor, or insurance company are exempt with no dollar limit, and the exclusion covers medical insurance premiums.9eCFR. 26 CFR 25.2503-6 – Exclusion for Certain Qualified Transfer for Tuition or Medical Expenses
The tuition and medical exclusions only work if you pay the provider directly. Write a check to the person, and it becomes an ordinary gift. If the recipient’s insurance later reimburses a medical bill you already paid, the reimbursed portion loses its exclusion and is reclassified as a taxable gift.9eCFR. 26 CFR 25.2503-6 – Exclusion for Certain Qualified Transfer for Tuition or Medical Expenses
Rates If You Actually Owe Tax
If your cumulative lifetime taxable gifts exceed $15,000,000, the excess is taxed on a graduated schedule. Rates start at 18 percent on the first $10,000 above the exemption and rise through the brackets to a maximum of 40 percent on amounts over $1,000,000.10Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax
In practice the lower brackets rarely matter. Because the unified credit already shelters the first $15,000,000, anyone who owes tax is almost certainly paying 40 percent on the excess. The lower brackets survive mainly in the arithmetic used to compute the credit.
Filing Form 709
You must file Form 709 for any year in which you give more than $19,000 to a single recipient, make a gift of a future interest in any amount, or elect gift splitting with your spouse.6Internal Revenue Service. Instructions for Form 709 (2025) Gifts covered by the tuition, medical, charitable, or spousal exclusions do not count toward the filing threshold.
Before you sit down with the form, gather your Social Security number or ITIN, the full legal name and address of each recipient and your relationship to them, a detailed description of each gift (serial numbers for securities, legal descriptions for real estate), fair market value figures backed by appraisals or brokerage statements, and copies of every prior Form 709 you have filed so the cumulative total is accurate.
On the form itself, you list each gift, apply the $19,000 annual exclusion per recipient, and carry the remaining taxable amount into the computation section, where the lifetime credit absorbs it. The form tracks your running total across all years.
Form 709 is due April 15 of the year after the gift, shifting to the next business day if that date falls on a weekend or federal holiday.6Internal Revenue Service. Instructions for Form 709 (2025) You can get an automatic six-month extension to October 15 by filing Form 8892.11Internal Revenue Service. Instructions for Form 8892 The extension covers filing, not payment; if you expect to owe tax, estimate and pay it by April 15. If you already filed Form 4868 to extend your individual income tax return, that extension automatically covers Form 709 too, and a separate Form 8892 is unnecessary.12Internal Revenue Service. About Form 8892 – Application for Automatic Extension of Time To File Form 709
Penalties for Late Filing or Bad Valuations
If you owe gift tax and file late, the failure-to-file penalty is 5 percent of the unpaid tax per month or partial month, capped at 25 percent. A separate failure-to-pay penalty of 0.5 percent per month applies to any unpaid balance, with its own 25 percent cap. Both penalties can accumulate on the same return at the same time.13Internal Revenue Service. 20.1.2 Failure To File/Failure To Pay Penalties
Valuation errors carry their own penalty. If you report a gift at 65 percent or less of its actual fair market value, the IRS can impose a 20 percent accuracy-related penalty on the resulting tax underpayment, as long as the underpayment exceeds $5,000. If the reported value is 40 percent or less of the correct value, the penalty doubles to 40 percent.14Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
A qualified appraisal is the simplest defense against both problems. It gives you an objective valuation you can point to, and it keeps the arithmetic behind your Form 709 clean enough that the running lifetime total holds up years later, when the IRS or your estate revisits it.