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- What counts as a gift for federal tax purposes
- The annual exclusion is per recipient
- Reporting a gift is not the same as paying gift tax
- Who files and when
- Gifts to spouses
- Direct tuition and medical payments
- Does the recipient pay income tax?
- Basis matters when gifted property is sold
- State taxes and other transfer rules
- Sources
Federal gift tax applies to certain transfers of property made for less than full value. The donor is generally responsible for reporting and paying it, while the recipient ordinarily does not include the value of a genuine gift in federal gross income. A gift above the annual exclusion can require Form 709 without producing an immediate tax bill.
Key Facts
- For 2026, the federal annual gift-tax exclusion remains $19,000 per donor, per recipient, for qualifying present-interest gifts.
- The donor generally files Form 709 and bears gift-tax liability; the recipient usually does not report the gift itself as federal income.
- A reportable gift first uses available lifetime exclusion, so filing Form 709 does not necessarily mean tax is currently due.
- Direct tuition payments to a qualifying school and direct payments to a medical provider can fall outside gift tax under § 2503(e).
- Gifted property generally carries the donor’s basis for gain, with a special fair-market-value rule for determining loss.
What counts as a gift for federal tax purposes
Internal Revenue Code §§ 2501 and 2511 reach direct and indirect transfers of real or personal, tangible or intangible property. A transfer can be a gift when property, money, or a valuable right is given without receiving adequate consideration in return. Calling a payment a loan or sale does not control if the economic terms show a gratuitous transfer.
Common examples include cash, securities, real estate, debt forgiveness, adding another owner to property, or selling an asset below fair market value. A completed transfer to certain trusts can also be a gift even though the beneficiary does not immediately possess the underlying property.
The amount of the gift is generally the property’s fair market value at the time of transfer, reduced by consideration actually received. Valuation is especially important for interests in private businesses, real estate, art, and fractional ownership.
The annual exclusion is per recipient
Section 2503(b) provides an annual exclusion for qualifying present-interest gifts, indexed for inflation. The IRS confirms that the amount remains $19,000 for calendar year 2026. A donor can apply a separate exclusion to each recipient during the year.
For example, one donor can give $19,000 to each of three children in 2026 and, assuming each transfer is a qualifying present interest and no other gifts were made to those children that year, the annual exclusion can cover all three transfers. The exclusion does not impose a single $19,000 cap on everything the donor gives during the year.
Spouses can elect gift splitting under § 2513, treating eligible gifts to third parties as made one-half by each spouse. This can allow two spouses to shelter up to $38,000 per recipient in 2026 with their combined annual exclusions, but each spouse may need a Form 709 and consent requirements apply.
A future interest generally does not qualify for the annual exclusion. Immediate rights to use, possess, or enjoy the property or its income matter. Trust terms therefore can make a transfer reportable even when its value is below $19,000.
Reporting a gift is not the same as paying gift tax
For gifts made in 2025, Form 709 instructions use a $19,000 annual exclusion and a $13,990,000 basic exclusion amount. For 2026, the annual exclusion remains $19,000 and the lifetime basic exclusion is $15,000,000. Amounts are tax-year specific and should be verified on the return for the year of the transfer.
A taxable gift above the annual exclusion generally reduces the donor’s remaining lifetime exclusion through the unified credit system. Federal gift tax becomes payable only after the cumulative computation exceeds the available exclusion and credits, subject to deductions and other adjustments. The 2025 Form 709 instructions show a top gift-tax rate of 40%, but that rate is not automatically applied to every gift exceeding $19,000.
Form 709 is nevertheless important because it records the gift, valuation, exclusions, deductions, elections, and use of lifetime exclusion. A complete disclosure can also affect the limitations period for later IRS valuation review.
Who files and when
A U.S. citizen or resident donor generally files Form 709 after giving more than the annual exclusion to one recipient, making a gift of a future interest, electing gift splitting, or making another reportable transfer. Spouses do not file a joint Form 709; each donor files separately when required.
The return is generally due April 15 of the year after the gift. An extension of the donor’s individual income-tax return can extend the time to file Form 709, but an extension of filing time does not automatically extend the time to pay gift tax. The detailed filing process is covered in the guide to Form 709.
The donor ordinarily pays the tax. The recipient should nevertheless retain documents showing the transfer date, value, and the donor’s basis because those records may be needed when gifted property is later sold.
Gifts to spouses
Section 2523 generally allows a marital deduction for qualifying gifts to a spouse who is a U.S. citizen. Terminable interests and certain trust arrangements can fail or modify the deduction, so not every transfer labeled as a spousal gift receives unlimited treatment.
Different rules apply when the recipient spouse is not a U.S. citizen. For gifts made in 2025, the special annual exclusion was $190,000, subject to qualification requirements. The inflation-adjusted amount for the year of the gift should be checked before relying on that limit.
Direct tuition and medical payments
Section 2503(e) excludes qualifying tuition and medical payments when the donor pays the educational institution or care provider directly. The tuition exclusion covers tuition, not books, supplies, room, board, or other charges. A payment to the student or patient for later reimbursement does not satisfy the direct-payment rule.
Medical payments must go directly to the provider for qualifying medical care. Insurance reimbursements reduce the amount eligible for the exclusion. These exclusions are separate from the annual $19,000 exclusion, so a donor may make a qualifying direct payment and also make an annual-exclusion gift to the same person.
A contribution to a 529 qualified tuition program is treated as a gift rather than a direct tuition payment. It can qualify for the annual exclusion and may be eligible for a five-year election, but the election requires Form 709 reporting.
Does the recipient pay income tax?
Section 102 generally excludes the value of property acquired by gift from the recipient’s federal gross income. That exclusion does not cover income later produced by the property. Interest, dividends, rent, and other post-transfer income can be taxable to the recipient.
A transfer from an employer to an employee is generally not excluded as a gift under § 102(c). Compensation cannot be converted into tax-free income merely by labeling it a gift.
Basis matters when gifted property is sold
Under § 1015, gifted property generally carries over the donor’s adjusted basis for calculating gain. If fair market value on the gift date is below the donor’s basis, a special fair-market-value rule applies when determining loss. This dual-basis feature can produce no recognized gain or loss when property is sold between those two amounts.
The donor should provide records showing acquisition cost, improvements, depreciation, prior adjustments, gift-date fair market value, and any gift tax attributable to appreciation. Without those records, the recipient may have difficulty calculating a later sale correctly.
State taxes and other transfer rules
Federal gift-tax rules do not determine state or local consequences. Before transferring property, the parties should separately check the current law and filing instructions for every relevant state and locality.
Citizenship and domicile also matter. Nonresident noncitizens face a different federal scope focused on U.S.-situated real and tangible property and generally use Form 709-NA.
Sources
- Office of the Law Revision Counsel — 26 U.S.C. § 2501
- Office of the Law Revision Counsel — 26 U.S.C. § 2511
- Office of the Law Revision Counsel — 26 U.S.C. § 2503
- Office of the Law Revision Counsel — 26 U.S.C. § 2513
- Office of the Law Revision Counsel — 26 U.S.C. § 2523
- Office of the Law Revision Counsel — 26 U.S.C. § 102
- Office of the Law Revision Counsel — 26 U.S.C. § 1015
- IRS — 2025 Instructions for Form 709
- IRS — Internal Revenue Bulletin 2026-29
- IRS — Gift Tax FAQs
