In an effort to prevent taxpayers from transferring wealth tax-free from one generation to the next, there are specific limits on the amount of gifts one may give to any one person each year. Amounts in excess of this limit are subject to filing an annual gift tax form. For most of us, this is not something we need to worry about. However, if handled incorrectly, it can create quite a surprise when the tax bill is due. That’s why understanding the gift-giving tax is so crucial.

Understanding the gift-giving tax

You may give up to $19,000 (up $1,000) to any individual (donee) within the calendar year 2026 and avoid any gift tax filing requirements. If married, you and your spouse may transfer up to $38,000 per donee. If you give a gift to your spouse who is not a U.S. citizen, the annual exclusion amount for 2026 is $175,000.

How to report the gift tax

• Amounts given in excess of this annual amount are subject to potential gift tax reporting. The amount of tax is currently unified with estate taxes, with a maximum rate of 40%. The donor of the gift is responsible for paying any associated tax. When you exceed the annual gift-giving amount, this triggers the need to file a gift tax form with your individual tax return. The excess gift amounts are netted against your lifetime unified credit. If your lifetime gifts do not exceed the credit, you may not owe additional taxes. Here are some instances when a gift tax problem may occur and ways to manage the problem:
• Gifts for college. Grandparents like to help with the tremendous cost of a college degree. Donations can quickly exceed the annual gift threshold. To avoid the gift tax, consider making payments directly to the college. This form of payment is excluded from the annual gift-giving limit so long as the funds are not used to pay for books, room, or board on behalf of the donee.
• Be careful with 529 plan funding. If your children are anticipating going to college, many consider creating a 529 college savings plan. You may then fund the savings plan (or have someone else fund it) on your child’s behalf. However, remember that deposits into 529 accounts are treated as gifts and are subject to the annual gift tax limits.
• Gifts to cover medical expenses. It is very easy to mount up a large medical bill. While you may want to step in and help by paying the individual’s medical bills, you may create a gift tax obligation. Better: make payments directly to health care providers for medical services on behalf of the patient to avoid gift tax exposure.
• Gifts to help make a down payment. It is becoming more common for family members to help their kids with the down payment on a first home. This can be tricky. Lenders will look for recent deposits in bank accounts and ask the prospective buyers to substantiate the source of funds. Providing the funds as a loan may disqualify the couple from obtaining a mortgage. Even worse is if the purchasing couple claims the funds are a gift. This action may create a gift tax obligation to the person providing the funds. You must ensure you provide an accurate audit trail to demonstrate that the gift does not exceed the annual limit.
• Gift of real estate. If you give property to a relative for little or nothing in return, you may need to file a gift tax form. Recent IRS studies suggest that over 50% of taxpayers fail to declare property transfers as gifts.

Other things to consider

You may provide gifts to or receive gifts from anyone. There are no limits or restrictions on who you may give a gift to or who may provide a gift to you. Creative gift-giving can be a useful way to help someone in need without creating a tax obligation.

Do not give a lump-sum gift for the maximum amount. If you provide a gift to an individual for the maximum allowable amount, you may not provide any other gifts to that person during the year. Otherwise, the event would be deemed excess gift-giving and require filing a gift tax form. For example, a grandmother gives her granddaughter $19,000 for college. She also pays for a family vacation to Disney World and provides a wonderful birthday gift. Technically, the additional gifts exceed the annual limit and would constitute a gift tax event.

The IRS is paying close attention to the massive noncompliance with the annual gift tax filing deadline. So much so that it is actively researching property transfers in key states to ensure the gift tax filing is taking place.

You may never need this tip, but if you do and you are unaware of this tax law, your tax life can get complicated quickly. Your main takeaway when understanding the gift-giving tax? Identifying when to ask about filing the gift tax form. Contact our RRBB advisors for more information or if you have any questions.