Gifting: Definition

The transfer of assets, such as cash, investments or property, from one person to another without receiving anything in return, often with the intent of helping the recipient with financial goals like education, buying a home, or investing. Gifting can also have tax implications for the donor.

 

Gifting is a highly effective estate planning tool that has been around for a long time. It’s benefited many. But without proper management of your generosity, you may end up giving a gift to the IRS in the form of a gift tax. Two factors determine how much you can give away before owing taxes on the gifted amount: the annual gift tax exclusion and the lifetime gift tax exemption.

 

Annual gift tax exclusion

The annual gift tax exclusion is the amount you can give to another individual without paying a gift tax. The annual gift tax exclusion for 2025 and 2026 is $19,000. That means you can give up to $19,000 to as many people as you want—kids, grandkids, in-laws, out-laws or people you just like. Married couples get double the gift tax limit and can give up to $38,000 per person. As long as you don’t give more than the annual exclusion, you don’t have to report the gift.

 

If you do give more than the annual exclusion amount, it doesn’t mean you have to pay a gift tax. It just means you need to disclose the excess amount on an IRS Form 709 gift tax return. The amount of your gift that goes above the annual limit will then be subtracted from your larger lifetime gift tax exclusion.

 

Something to keep in mind, gifts between spouses are unlimited and generally don’t trigger a gift tax return. And gifts to qualified nonprofits are classified as charitable donations, not gifts. Other gifts not subject to the annual exclusion include gifts to political organizations, gifts that qualify for educational exclusion such as tuition payments, and gifts that qualify for medical exclusions.

 

Lifetime gift tax exemption

The lifetime exemption is the amount you can give during your lifetime or can be passed on to heirs after your death free of gift or estate taxes. For 2025, the inflation-adjusted exemption is $13,990,000. In 2026 that increases to $15 million.

 

Whenever you file a gift tax return and report an amount more than the annual exclusion, that amount is subtracted from your lifetime gift exemption. When you die, anything left of your lifetime exemption can be used to offset some or all of the taxes on your estate.

 

For example, if you give your sister $50,000 in 2025, you gave more than your annual gift exclusion ($50,000-$19,000).

$50,000   Gift

-19,000    Annual Exclusion

_______

$31,000    Overage

 

You will have to file a gift tax return to report the overage, but you probably won’t have to pay a gift tax. The $31,000 gets deducted from your lifetime exemption amount.

 

What is the gift tax rate

If your generosity causes you to exceed the exclusions and you have to pay a gift tax, how much will it cost you? The rates range from 18%-40%, the same rates as the federal estate tax.

 

Taxable amount Rate of tax
up to $10,000 18%
$10,001 to $20,000 20%
$20,001 to $40,000 22%
$40,001 to $60,000 24%
$60,001 to $80,000 26%
$80,001 to $100,000 28%
$100,001 to $150,000 30%
$150,001 to $250,000 32%
$250,001 to $500,000 34%
$500,001 to $750,000 37%
$750,001 to $1,000,000 39%
$1,000,000 and over 40%

 

Gift tax red flags

The amount of gifts that require you to file a gift tax return are clear—any gift that exceeds $19,000 in 2025 or 2026. But there are some things that will trigger a gift tax return that may surprise you:

  • Treating family and friends to a vacation.
  • Paying for someone else’s living expenses.
  • Letting someone live rent-free in your home.
  • Grandparents putting large sums into a grandchild’s 529 plan.
  • Paying for a child’s expensive wedding or honeymoon.
  • Giving interest-free loans.
  • Loaning money and then deciding the loan doesn’t need to be paid back.

 

 

Disclaimer:

This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors; all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investments at 1-888-777-0970 or email us at info@alhambrapartners.com.