Gifting: Unwrapping the Tax Implications
By Mahoney
Whether it’s down payments, birthday presents, or car repairs, a desire to share our good fortune with friends and family when they need it most is only natural. However, when tax time rolls around, both the giver and the recipient are often left with an array of questions, the most common being, “is this gift taxable?”
The tax implications of gifting can be complex to navigate. Read on for an overview of what the IRS considers a ‘gift’, how gifts are treated for tax purposes, and potential tax law changes on the horizon.
What is a 'Taxable Gift'?
According to the IRS, a taxable gift is “any transfer to an individual, either directly or indirectly, where full consideration is not received in return.” Common examples include cash or property, but it also covers paid expenses, forgiven loans, and gifts of stock or other intangible assets.
Any gift that falls under the definition above is assumed to be a “taxable gift” by default, unless it meets one of the following exceptions:
- Gifts below the annual exclusion limit (more on this below)
- Tuition or medical expenses paid on someone’s behalf
- Gifts to your spouse
- Gifts to a political organization for its use
- Gifts to qualifying charities
For 2025, the annual gift tax exclusion is $19,000 per recipient. Married couples can each use their own exclusion and opt for gift splitting, raising the combined exclusion to $38,000 for joint gifts. For example, a couple gifting $32,000 to a child can elect gift splitting, treating it as two $16,000 gifts to avoid taxable gift status. Looking ahead at 2026, this exclusion will stay at $19,000.
Exclusions, Exemptions, & Exceptions: How is a gift taxed?
The Estate Tax
So, now that we know what a “taxable gift” is…how is it taxed? The answer starts at an unlikely place: the estate tax.
The estate tax is a federal tax imposed on the fair market value of property you own or have certain interests in upon your death. Below is a high-level overview of the four “pieces” of a taxable estate:
- Add: Everything you own or have certain interests in at your date of death
- Subtract: Certain deductions such as mortgages and other debts, estate administration expenses, etc.
- Add: The value of lifetime taxable gifts given.
- Subtract: The federal estate exemption (more on this below)
Step three is where the “gift” piece comes in. It is quite rare for any tax to be owed at the time of the gift. Instead, lifetime gifts are factored into the formula above by the donor when filing their estate tax return (Form 706), potentially affecting the amount of any estate tax liability.
The Gift Tax & Law Changes
For most taxpayers, the impact of taxable gifts won’t be felt until the estate tax is triggered. However, in some cases, gift tax may be due at the time of the gift. Regardless of whether tax is owed, taxable gifts still require filing a return.
If gifts exceed the annual exclusion, a gift tax return (Form 709) must be filed with the IRS to disclose the current-year gift and any cumulative taxable gifts from previous years. These returns are only required federally and are typically just informational unless a donor’s lifetime taxable gifts surpass the federal estate tax exemption, which is $13.99 million in 2025 and $15 million in 2026. This is a tall hill to climb for most, which is why the effect of lifetime taxable gifts is rarely seen until the giver passes away.
The Tax Cuts Job Act (TJCA) raised the estate tax exemption from $5.49 million ton $11.18 million in 2018, but this increase was originally set to expire after 2025. Reverting to pre-TCJA law would have brought the exemption down to roughly $7 million for 2026. However, recent legislation has changed this outlook: beginning January 1, 2026, the estate tax exemption will increase to $15 million per individual under the One Big Beautiful Bill Act (OBBBA), which Congress passed in 2025. While this change offers a period of stability for taxpayers undergoing estate planning, the legislative landscape remains fluid, and future extensions or modifications are always possible.
There is no shortage of misconceptions when it comes to tax implications of gifting, both by donors and recipients. However, when it is used effectively, lifetime gifting can be a key estate planning tool.
Contact your Mahoney tax advisors for more information on gifting and how it might impact your tax situation.
Manager, Tax Solutions Team
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