Section 2501 Gift Tax: Exclusions, Exemption, and Form 709

The federal gift tax applies when you transfer money or property to someone and get less than full value back, but two large allowances mean most people never pay it. For 2026, you can give any individual up to $19,000 during the year with no tax and no paperwork, and beyond that, a $15 million lifetime exemption absorbs additional gifts before any tax is actually owed.¹ The tax itself is authorized by Section 2501 of the Internal Revenue Code and reaches every kind of property, not just cash.² What most givers actually need to know is which transfers count, how to stay under the annual exclusion, and when a return has to be filed even if no tax is due.

What Counts as a Gift

A gift is any transfer where the other person gets more value than they paid for. That includes obvious things like handing over cash or writing your child into the deed on a house. It also includes several less obvious moves that catch people off guard.

Selling property to a family member below its fair market value is a gift equal to the discount. Forgiving a loan you made to a relative is a gift for the balance you wrote off. Paying a family member’s mortgage, tuition bill, or credit card debt directly is a gift in the amount paid. The IRS doesn’t care whether you intended a gift or thought of the transfer that way. The question is whether the recipient came out ahead.³

Genuine business transactions are treated differently. A sale made in the ordinary course of business at arm’s length is not a gift even if the price turns out to be low.³ Between family members, though, a bargain price will draw scrutiny.

Interest-Free and Low-Interest Loans

Lending money to a family member at no interest or below-market interest creates a small gift every year the loan is outstanding. Under Section 7872, the IRS treats the difference between what you charged and what you should have charged at the applicable federal rate as a gift, deemed made on the last day of each calendar year.⁴ For small family loans this is usually well within the annual exclusion, but larger balances can add up.

Completed vs. Revocable Transfers

A gift is taxable only when it is complete, meaning you have given up the power to take it back or redirect it to someone else. Putting stock into a revocable trust isn’t yet a gift because you can still pull the assets out. Once the transfer becomes irrevocable and you lose control over who benefits, the gift is complete and its fair market value on that date is the taxable amount.

The $19,000 Annual Exclusion

The annual exclusion does most of the work in ordinary gift planning. For 2026, you can give up to $19,000 to any number of individual recipients without owing tax and without filing a return.⁵ The limit is per recipient, per year, and it resets every January 1. Give $19,000 to each of three children and each of their spouses in the same year, and you have moved $114,000 out of your estate with no tax and no paperwork.

One condition applies: the annual exclusion covers only gifts of a “present interest,” meaning the recipient can actually use the property now.⁶ Cash and publicly traded securities qualify without difficulty. Money locked into a long-term trust does not, unless the trust gives the beneficiary an immediate right to withdraw the contribution.

Tuition and Medical Payments Don’t Count

Paying someone’s tuition or medical bills directly is not a gift at all, no matter how large the payment. These “qualified transfers” sit entirely outside the gift tax and do not use up any part of the $19,000 annual exclusion or the lifetime exemption.⁷ You can pay $80,000 of a grandchild’s college tuition and still give that grandchild an additional $19,000 in the same year with no tax consequences.

Two rules matter here. The payment must go straight to the school, hospital, doctor, or insurer. Writing a check to the student or patient so they can pay the bill themselves turns it into a regular gift. And the tuition exclusion covers tuition only. Room and board, books, and fees don’t qualify. On the medical side, expenses that get reimbursed by the recipient’s insurance don’t qualify either.⁷

Gifts to a Spouse and to Charity

Gifts between spouses who are both U.S. citizens have no limit. The unlimited marital deduction lets you transfer any amount to your spouse with no gift tax and no impact on your lifetime exemption.⁸ Those assets will eventually be counted in your spouse’s estate, so this shifts the timing rather than eliminating any future tax.

If your spouse is not a U.S. citizen, the unlimited deduction does not apply.⁹ In its place, you get a larger annual exclusion: $194,000 for 2026.¹⁰ Anything above that draws down your lifetime exemption.

Gifts to qualifying charities are fully deductible with no dollar cap.¹¹ Eligible recipients include religious, educational, scientific, and charitable nonprofits, along with government entities and certain veterans’ organizations. Handing money directly to an individual in need, however generous the motive, does not qualify as a charitable gift.

The $15 Million Lifetime Exemption

When a gift exceeds the annual exclusion, the excess doesn’t immediately produce a tax bill. Instead, it draws down your lifetime exemption, which for 2026 is $15 million per person.¹ A married couple can shelter up to $30 million combined. Only after the lifetime exemption is fully consumed do you owe actual tax, and the top rate is 40%.¹²

The exemption is unified with the estate tax. Every dollar you use during your life is one dollar less available to shield your estate at death. Make $3 million in taxable gifts over your lifetime, and $12 million of exemption remains for your estate. The running total is tracked cumulatively on the returns you file for each year you report gifts.

The $15 million figure reflects a recent change. The higher exemption established under the 2017 Tax Cuts and Jobs Act was set to revert to pre-2018 levels on January 1, 2026. The One, Big, Beautiful Bill Act, signed on July 4, 2025, eliminated that sunset by permanently setting the exemption at $15 million for 2026 and indexing it for inflation starting in 2027.¹

Splitting Gifts With a Spouse

Married couples can elect to treat a gift made by one spouse as if half came from each. This is called gift splitting, and it effectively doubles the annual exclusion for a single gift to $38,000 per recipient in 2026.⁵ If one spouse writes a $38,000 check to a child, the couple can treat it as two $19,000 gifts, one from each parent, and neither triggers tax or reduces the lifetime exemption.

Both spouses must consent, both must be U.S. citizens or residents, and both must be married at the time of the gift.¹³ The election applies to every gift either spouse made during the year, not just the one you want to split. And even when no tax is owed, making the election requires both spouses to file a return for that year. People sometimes skip the filing because nothing is due and then lose the benefit of the election.

When You Have to File Form 709

You must file IRS Form 709 for any year in which you give more than $19,000 to a single recipient, elect gift splitting with your spouse, or make gifts that trigger generation-skipping transfer tax reporting.¹⁴ The return is due April 15 of the year after the gift.

Filing does not mean paying. In most cases, the return simply reports that you’ve used a piece of your lifetime exemption. Actual tax is due only if that exemption is exhausted.

If you need more time, Form 8892 gives you an automatic six-month extension to file, though not to pay any tax owed.¹⁵ If you’re already filing Form 4868 to extend your income tax return, that same extension automatically covers Form 709.¹⁶

The donor is responsible for paying any gift tax. If the donor doesn’t pay, the IRS can pursue the recipient, but only up to the value of the gift received.¹⁷ That rarely happens in practice, but it’s worth knowing if you’re on the receiving end of a very large gift.

What the Recipient Should Know

Recipients of a gift don’t pay gift tax, and they don’t owe income tax on the gift itself. But there’s a tax consequence that shows up later, when they sell.

When you receive gifted property, you inherit the donor’s original cost basis.¹⁸ If your parents bought stock for $50,000 and give it to you when it’s worth $500,000, your basis is $50,000. Sell the next day for $500,000 and you owe capital gains tax on $450,000. This “carryover basis” is one of the biggest differences between receiving property as a gift and inheriting the same property at death, where the basis generally resets to fair market value on the date of death.

If the donor paid gift tax on the transfer, the recipient’s basis is bumped up by the portion of that tax attributable to the property’s appreciation, though the basis can never exceed the property’s fair market value on the date of the gift.¹⁹ For highly appreciated assets where no gift tax was actually paid because the lifetime exemption absorbed it, the full unrealized gain passes to the recipient. For that reason, gifting appreciated assets during life is often worse tax-wise than leaving them at death.

Gifts That Skip a Generation

Gifts from a grandparent directly to a grandchild, or to any other person more than one generation below the donor, can trigger a separate generation-skipping transfer tax on top of the regular gift tax. Each person has a GSTT exemption equal to the basic exclusion amount, so through 2026 the tax reaches only transfers above $15 million. Gifts within the annual exclusion are generally exempt from GSTT as well, which is why regular annual gifts to grandchildren are a common planning tool. GSTT reporting also happens on Form 709.¹⁴

The practical takeaway for anyone doing ordinary family giving: with a $19,000 annual exclusion per recipient, unlimited direct payments for tuition and medical care, unlimited transfers to a U.S. citizen spouse, and a $15 million lifetime exemption on top of all that, a couple can move very large sums to the next generation each year without owing a dollar of gift tax. The filing rules, not the tax itself, are what most givers actually have to manage.

1
Internal Revenue Service. What’s New – Estate and Gift Tax
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Office of the Law Revision Counsel. 26 U.S. Code 2501 – Imposition of Tax
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eCFR. 26 CFR 25.2512-8 – Transfers for Insufficient Consideration
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Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
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Internal Revenue Service. Frequently Asked Questions on Gift Taxes
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Office of the Law Revision Counsel. 26 U.S. Code 2503 – Taxable Gifts
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eCFR. 26 CFR 25.2503-6 – Exclusion for Certain Qualified Transfer for Tuition or Medical Expenses
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Office of the Law Revision Counsel. 26 U.S. Code 2523 – Gift to Spouse
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eCFR. 26 CFR 25.2523(i)-1 – Disallowance of Marital Deduction When Spouse Is Not a United States Citizen
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Internal Revenue Service. Frequently Asked Questions on Gift Taxes for Nonresidents Not Citizens of the United States
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Office of the Law Revision Counsel. 26 USC 2522 – Charitable and Similar Gifts
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Office of the Law Revision Counsel. 26 U.S. Code 2502 – Rate of Tax
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Office of the Law Revision Counsel. 26 USC 2513 – Gift by Husband or Wife to Third Party
14
Internal Revenue Service. About Form 709, United States Gift and Generation-Skipping Transfer Tax Return
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eCFR. 26 CFR 25.6081-1 – Automatic Extension of Time for Filing Gift Tax Returns
16
Internal Revenue Service. Instructions for Form 8892
17
Office of the Law Revision Counsel. 26 USC 6324 – Special Liens for Estate and Gift Taxes
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Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
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eCFR. 26 CFR 1.1015-5 – Increased Basis for Gift Tax Paid