The Federal Gift Tax

In this post, I discuss how the gifts you make may result in a large tax bill, courtesy of the federal gift tax, and how this backstops the estate tax.

The gift tax, as the name suggests, is a tax on certain gifts. It serves as a backstop to the estate tax, preventing wealthy estates from escaping the estate tax by gifting away property prior to death. The tax is imposed upon the giver of the gift, rather than the recipient, and utilizes the same rates as the estate tax with a top rate of 40%.

Gifts Exempt from the Gift Tax

Certain types of gifts are generally exempt from the gift tax. These include gifts to charity, gifts to political organizations, and gifts to one’s spouse. In addition, paying someone’s tuition or medical expenses is generally not considered a taxable gift, so long as the giver pays the charging institution—such as a university or hospital—directly.

In addition, annual gifts to any one person of $19,000 (the 2026 figure, adjusted annually for inflation per IRS Rev. Proc. 2025-32) or less are not subject to the tax. Married couples may combine their annual exclusions, thereby allowing them to give away $38,000 per recipient per year. Since this exclusion applies to each recipient, giving 10 people $19,000 each per year would not incur a tax liability, but giving one person $190,000 probably would.

Unified Credit

Both the estate and gift tax share the unified credit—the amount of tax that is forgiven at death or during lifetime gifting. For decedents dying in 2026 (and for lifetime gifts in 2026), the unified credit corresponds to a basic exclusion amount of $15,000,000 per individual, per IRS Rev. Proc. 2025-32 and the One Big Beautiful Bill Act, signed July 2025. This means that you can gift away up to $15,000,000—not counting the annual exclusion amount, which does not deplete the unified credit—over the course of your lifetime without owing any gift tax. Any amount of the unified credit that you utilize for gift tax purposes, however, will be unavailable at death to apply toward the estate tax. Therefore, formulating a sound strategy to take advantage of the unified credit at the appropriate time is an important part of any large estate’s planning.

Gifts and the Income Tax

Recipients of gifts do not have to report the value of the gifts on their income tax returns. Determining what constitutes a gift, however, is important for both income and gift tax purposes and can be quite complex. The Supreme Court held in Commissioner of Internal Revenue v. LoBue that a gift is a transfer that demonstrates a “detached and disinterested generosity.” This definition leaves much to be desired.

It should be noted, however, that an employer generally cannot give an employee a gift beyond a de minimis amount. In the past, some employers would “gift” an employee a special bonus, such as a new car, so that the employee could exclude the value of that bonus from their income tax return. Unsurprisingly, the government disallowed such a scheme.

Disclaimer: This post is for informational purposes only and is not legal advice. Gift- and estate-tax planning is highly fact-specific, and federal exclusion amounts adjust annually; consult a qualified estate-planning attorney about your situation.

---