What Is a Gift Tax? Exclusions, Exemptions, and Form 709

The federal gift tax is a tax on transfers of money or property to someone else for less than full value, and it is paid by the person making the gift. For 2026, you can give up to $19,000 to any one person without even reporting it, and a $15,000,000 lifetime exemption shields almost everyone from ever owing a dollar.¹ The tax exists to stop people from giving their wealth away during life to avoid the estate tax at death.

What Counts as a Gift

For tax purposes, a gift is any transfer where you receive less than full value in return.² Cash is the obvious case, but real estate, stocks, forgiven debts, and interest-free loans all qualify. Selling your house to your daughter for half its market value creates a gift equal to the discount.

The donor pays the tax, not the recipient.³ That is worth repeating because it is the single most common misconception about how this tax works. If you receive a large gift, you owe no federal gift tax on it.

The Annual Exclusion and the Lifetime Exemption

Two numbers decide whether you have to file anything and whether you actually owe tax.

The annual exclusion for 2026 is $19,000 per recipient.¹ Give up to that amount to any single person in a year and no reporting is required. Give the same amount to ten different people and you still have nothing to file. The figure is adjusted for inflation and rounded down to the nearest $1,000.⁴

Going above the annual exclusion does not mean you owe tax. It means the excess reduces your lifetime exemption, which for 2026 sits at $15,000,000.⁵ That exemption is shared with the estate tax, so whatever you use during life is unavailable to shelter your estate at death. Beginning in 2027, the lifetime exemption starts adjusting upward for inflation.⁶

Actual tax comes due only after you have used up the entire $15,000,000. At that point, rates run up to 40 percent.⁷ The practical result: nearly every gift tax return filed is informational, tracking usage of the lifetime exemption without producing any payment.

Gifts That Don’t Count Against Either Limit

Some transfers sit entirely outside the gift tax system. They do not use your annual exclusion and do not reduce your lifetime exemption.

Gifts to your spouse, if your spouse is a U.S. citizen. There is no ceiling.⁸
Tuition paid directly to an educational institution for someone else. The check must go to the school. Handing your grandchild cash to pay tuition does not qualify, and neither do room, board, or books.⁹
Medical expenses paid directly to the provider. Same rule as tuition: the payment goes to the provider, not the patient.⁹
Contributions to political organizations for their use.¹⁰

If your spouse is not a U.S. citizen, the unlimited marital deduction does not apply.⁸ In place of it, you get a higher annual exclusion for gifts to that spouse — $194,000 for 2026, indexed for inflation.¹

Gift Splitting for Married Couples

A married couple can agree to treat any gift by either spouse as if each made half. That doubles the annual exclusion to $38,000 per recipient without touching either spouse’s lifetime exemption.¹¹

To split gifts, both spouses must be U.S. citizens or residents at the time of the gift, married to each other at the time of the gift, and neither can remarry someone else during that calendar year. Both must consent, and the consent applies to every gift either spouse made during the year. You cannot split some and not others.¹¹

Splitting makes both spouses jointly and severally liable for any resulting gift tax. Usually both spouses must each file Form 709. If only one spouse made gifts and no recipient received more than $38,000 in present-interest gifts, only the donor spouse files, and the other spouse signs to indicate consent.¹²

How Gifts Are Valued

A gift’s value is its fair market value on the date the transfer is complete — what a willing buyer would pay a willing seller when neither is forced to act.² Cash is worth its face amount. Publicly traded securities are valued using the average of the high and low trading prices on the gift date. Real estate, closely held business interests, and other hard-to-value assets need a professional appraisal, and you should keep it on file in case the IRS asks.

What the Recipient Takes On: Carryover Basis

Receiving a gift may cost you nothing today, but it can matter later. When you receive gifted property, you generally take over the donor’s original cost basis.¹³ If a parent bought stock for $10,000 and gives it to you when it is worth $50,000, your basis is still $10,000. Sell it that day and you owe capital gains tax on $40,000.

A separate rule applies when property has lost value in the donor’s hands. If the donor’s basis is higher than the fair market value on the gift date, you use the fair market value for calculating a loss. This prevents transferring built-in losses. If the donor actually paid gift tax on the transfer, the recipient’s basis can be increased by that amount, though not above the property’s fair market value at the time of the gift.¹³

The 529 Plan Five-Year Election

Contributions to a 529 education savings plan count as gifts, but a special rule lets you front-load. You can put in up to five years’ worth of the annual exclusion in one year — $95,000 for 2026 — and treat it as spread evenly across five calendar years for gift tax purposes.¹⁴ A married couple using gift splitting can push $190,000 into a single beneficiary’s account in one year.

Two catches. You cannot make additional annual exclusion gifts to that same beneficiary during the five-year window without going over. And if you die before the five years end, the portion allocated to years after your death is pulled back into your taxable estate.¹⁴ You make the election on Form 709.

When You Have to File Form 709

Reportable gifts go on IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return.¹⁵ You have to file if:

You gave more than the $19,000 annual exclusion to any one recipient during the year
You and your spouse elected to split gifts
You gave someone a future interest in property, regardless of amount

The return asks for the recipient’s name, address, and taxpayer identification number; a description of the property; the date of transfer; the fair market value; and your adjusted basis. Attach any appraisal supporting your valuation.

The deadline is April 15 of the year after you made the gift.¹² An extension on your federal income tax return automatically extends your gift tax return too. Married couples file separately, always — there is no joint Form 709. You can file electronically through the IRS Modernized e-File system or mail a paper return.¹⁶ Keep the return, appraisals, and transfer records for the rest of your life, because they feed into your estate tax calculation eventually.

Penalties for Filing Late

If you owe gift tax and file late, the penalty is 5 percent of the unpaid tax for each month or part of a month the return is late, capped at 25 percent.¹⁷ A separate failure-to-pay penalty applies to unpaid tax shown on the return, and interest accrues from the original due date.

Purely informational returns — the common case, where you are just using lifetime exemption — generate no dollar penalty because there is no unpaid tax to calculate against. Filing still matters. A filed return starts the statute of limitations. Without one, the IRS can challenge your valuations and exemption use with no time limit.

A Note on Gifts to Grandchildren

If you give to a grandchild or anyone two or more generations below you, a separate generation-skipping transfer tax may apply on top of the gift tax. The GST exemption for 2026 is $15,000,000, matching the lifetime gift and estate exemption, and you allocate it on Form 709 when reporting the gift.¹⁸ 15 Large transfers down two generations are worth running past a tax professional before you make them.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
2
Office of the Law Revision Counsel. 26 USC 2512 – Valuation of Gifts
3
Office of the Law Revision Counsel. 26 USC Ch. 12 – Gift Tax
4
Office of the Law Revision Counsel. 26 USC 2503 – Taxable Gifts
5
Office of the Law Revision Counsel. 26 U.S. Code 2010 – Unified Credit Against Estate Tax
6
Internal Revenue Service. What’s New – Estate and Gift Tax
7
Office of the Law Revision Counsel. 26 U.S. Code 2502 – Rate of Tax
8
Office of the Law Revision Counsel. 26 U.S. Code 2523 – Gift to Spouse
9
Office of the Law Revision Counsel. 26 U.S. Code 2503 – Taxable Gifts – Section: Exclusion for Certain Transfers
10
Office of the Law Revision Counsel. 26 USC 2501 – Imposition of Tax
11
Office of the Law Revision Counsel. 26 U.S. Code 2513 – Gift by Husband or Wife to Third Party
12
Internal Revenue Service. Instructions for Form 709
13
Office of the Law Revision Counsel. 26 U.S. Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
14
Office of the Law Revision Counsel. 26 U.S. Code 529 – Qualified Tuition Programs
15
Internal Revenue Service. About Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return
16
Internal Revenue Service. Modernized e-File (MeF) for Gift Taxes
17
Internal Revenue Service. 20.1.2 Failure To File/Failure To Pay Penalties
18
Internal Revenue Service. What’s New – Estate and Gift Tax