How to avoid gift taxes

How to avoid gift taxes

Year-end is gift giving season. Our clients are very generous and often wish to give to family, friends, and charities they care about. With proper planning for most U.S. citizens, the answer to the question, “How much is the gift tax?” can be “not one red cent”, even if the gift is large.

What is the gift tax?

The gift tax is the federal tax system for transfers made during life. It uses the same unified framework as the estate tax and is generally the donor’s responsibility—not the recipient’s.

For 2026, the federal estate and gift tax basic exclusion amount is $15,000,000 per person. With portability and proper planning, a married couple may protect up to $30,000,000 from these transfer taxes. Transfers above the available exclusion can face a federal tax rate as high as 40%. This is a separate tax from any income taxes that could be payable by the estate or the beneficiaries.

Why have a gift tax at all? Without it, someone near the end of life could give assets away and claim those assets were not part of the estate. The gift tax limits those “deathbed” transfers designed solely to avoid estate tax.

2026 gift tax limits at a glance (all are increased annually)

• Annual gift tax exclusion: $19,000 per donor, per recipient ($20,000 in 2027)
• Married couple giving to one recipient: up to $38,000, if requirements are met ($40,000 in 2027)
• Federal lifetime estate and gift tax exclusion: $15,000,000 per individual ($15,480,000 in 2027)
• Potential married-couple exclusion: up to $30,000,000 with portability and proper planning ($30,960,000 in 2027)
• 529 plan five-year election: up to $95,000 per donor, per beneficiary ($100,000 in 2027)

What counts as a gift?

The short answer: a gift is generally a completed transfer for less than full value.

What makes a gift complete?

A transfer generally must be full and final—a “completed gift.” It cannot depend on a future event, and the donor generally cannot retain the right to take the asset back.

There are gifting techniques which allow funds to be used for the donor’s benefit. For instance, a gift can be made to a trust that pays the donor income for a specified time period, after which the assets shift to a beneficiary. (This technique can be complex and is beyond the scope of this post, but we wanted to acknowledge not all gifting involves the immediate and full surrender of an asset.) 

What constitutes full value?

The gift is generally valued at fair market value when the transfer is completed, not at whatever value the donor would prefer to claim. The core definition the IRS cites is “FMV is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. “

What gifts are excluded from gift tax?

Several common transfers can qualify for exclusions or deductions. The rules differ, so the payment method and recipient matter.

Spouses and charities

Gifts to a U.S.-citizen spouse generally qualify for the unlimited marital deduction. Gifts to qualified charities are likewise not limited for gift tax purposes and can come with income tax benefits.

Annual exclusion gifts

For gifts to non-spouse, non-charitable recipients, there is an “annual gift tax exclusion.” For 2026, the annual gift tax exclusion is $19,000 per recipient. The exclusion permits you to give up to $19,000 of qualifying present-interest gifts to each of as many people as you like during 2026.

Your spouse is also able to separately give $19,000 to each recipient. Therefore, between a couple, up to $38,000 can be given to each recipient without using either spouse’s lifetime exclusion. Keep in mind the limit is per donor, per recipient, per year. Suppose you wish to make gifts to your married son and his spouse. You and your spouse can each give $19,000 to each of them, for a total of $76,000 in gifts during 2026 without using either spouse’s lifetime exclusion.

When is Form 709 required?

For gifts that exceed the $19,000 annual exclusion, you may need to file Form 709 depending on the amount, ownership of the transferred property, and any elections made. “Gift-splitting” elections may require Form 709. This is a special tax form that is not found in the typical 1040 tax packet.

Five-year election for 529 plans

Direct tuition and medical payments

A payment made directly to an educational institution for tuition on behalf of a student, or directly to a medical provider for qualifying medical expenses, is not subject to the annual exclusion and does not affect the lifetime exemption.

How can you avoid gift taxes on large gifts?

Gift taxes on large gifts can be avoided with proper planning. Here is a simple example.

Suppose a mom and dad want to give $100,000 to their married son and his spouse. Using the 2026 annual exclusions, mom can gift $19,000 to the son and another $19,000 to the son’s spouse for a total of $38,000. Likewise, dad can gift a total of $38,000 by gifting $19,000 to the son and another $19,000 to the son’s spouse. Combined, the couple can give a grand total of $76,000 in 2026 without using any of their lifetime exclusions.

What about the remaining $24,000? The two most common ways to avoid tax on this $24,000 are to spread the gift over two tax years or use part of the lifetime exclusion.

Spread gifts across tax years

Because the exclusion is available annually, if the need for the $100,000 is not urgent, they could make the gifts over two tax years. We often see this done in the fall. Our couple could give $76,000 now and the remaining $24,000 after New Year’s, assuming no other gifts to those recipients use the applicable 2026 annual exclusions.

Use part of the lifetime exclusion

Even if the annual limit is exceeded in a single year, gift taxes may still be avoided. Say this couple could not wait until the following year to give the $24,000. They would file Form 709, and use $24,000 of their lifetime exclusions to offset the tax. They could each use $24,000 of one of their exclusions or allocate the $24,000 in any proportion they choose. Say all $24,000 is applied to dad’s lifetime exclusion. His remaining basic exclusion amount would be $14,976,000 ($15,000,000 less $24,000)and mom’s would remain $15,000,000, assuming no prior use of their exclusions.

Both the $19,000 annual exclusion and the $15,000,000 lifetime exclusions are increased annually for  inflation. This means even more tax-free gifting is possible in the future. For 2027, the annual exclusion rises to $20,000 and the lifetime exclusion goes to $15,480,000.

What other taxes might affect our gifting?

The most common other taxes that can affect a gifting plan are income taxes and capital gain taxes. Other than for direct gifts to charity from an IRA, if the money for a gift comes from an IRA or retirement plan like a 401(k), the donor must first pay the applicable income taxes on the withdrawal from the account. These withdrawals are taxed at rates for ordinary income.

If one donates an asset that has risen in value such as a piece of property or investment holdings, the recipient will pay capital gains tax on the gains whenever they sell the asset.

For most people, gift taxes are avoidable

Gift and estate tax rules are fact-specific and we have covered only the basics in this post. Despite the complexity of our tax code, basic gifting goals can usually be satisfied without gift taxes using simple techniques and the right paperwork. Some situations are more complicated: a beneficiary may not handle a large gift responsibly, an asset may be hard to divide, or differences in income tax brackets may create other tax-saving opportunities—or tax traps.

Nonetheless, one of the things we love about our clients is that they are generous. We have facilitated many gifts to family, close friends, and charity over the years, and we would be happy to help optimize your giving should that be your desire.