In an effort to keep taxpayers from transferring wealth from one generation to the next tax-free, there are specific limits to 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, but if handled incorrectly it can create quite a surprise when the tax bill is due.

The Gift Giving Rule

You may give up to $19,000 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 provide a gift to your spouse who is not a U.S. citizen, the annual exclusion amount is $175,000 for 2026.

Gift Tax Reporting

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 have additional taxes owed. Here are some instances when a gift tax problem may occur and ways to manage the problem:

• Gifts for college. Grandparents like to help out with the tremendous expense of funding a college degree and amounts donated can quickly surpass the annual gift threshold. To avoid the gift tax problem consider making payments directly to the college as this form of payment can be excluded from the annual gift giving limit AS 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 behalf of your child. However, remember the deposits into 529 accounts are considered a gift and are subject to the annual gift giving limits.
  
  
• Gifts to cover medical expenses. It’s very easy to mount up a large medical bill. While you may want to step in and help out by giving money to the individual with the medical bills, you may be creating a gift tax obligation. The better option may be to 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 to have family members 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 taking on a mortgage. Even worse, if the purchasing couple claims the funds are a gift, this action may create a gift tax obligation to the person providing the funds. Care must be taken to provide the correct audit trail to prove the gift does not exceed the annual amounts.
  
  
• Gift of real estate. If you give property to a relative for little or nothing in return, this generates the need to file a gift tax form as well. Recent IRS studies suggest more than 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 tool 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 for the maximum allowable to an individual, you may not provide any other gifts to this person during the year, or else the event will be deemed excess gift giving and require filing a gift tax form. For example, a grandmother gives $19,000 to her granddaughter for college. She also pays for a vacation trip to send the family to Disney World and provides a wonderful birthday gift. The additional gifts are technically in excess of the annual limit and would present a gift tax event.
  
  

The IRS is paying attention to the massive non-compliance in the timely filing of annual gift tax forms. So much so, that it’s actively researching property transfers in key states to ensure the gift tax filing is taking place.

What this means for you

You may never encounter a need for this tip, but if you do AND you are unaware of this tax law, your tax life can get complicated quickly. Your main takeaway? Identifying when to ask about filing the gift tax form.