Gifting, annual gift exclusions, gift taxes and gift tax returns (IRS Form 709)
I often see and get a lot of questions around making gifts to people, if those gifts are taxable, if a gift tax return needs to be filed, etc. Thankfully, the tax implications around making gifts is a non-issue for the vast majority of people, other than maybe having to file a gift tax return. But, even then, that doesn’t mean anyone has to pay tax on the gift. For most folks, a gift tax return is nothing more than a minor nuisance reporting requirement, but not actually a taxable event for anyone (i.e. not the give giver or the gift receiver).
What’s a gift
Let’s first define a “gift,” as I’ll be using the term here. For purposes of this article, a gift is when you give something of value to someone and you don’t get something of equal value in return. And note that I’m not considering anything gifted/donated to a qualified charity a “gift” as far as this article is concerned. Donations to charity are completely different and have their own rules around reporting, tax implications/deductions, etc. I’ll save talking about charitable donations until a later date.
An example of a gift is giving cash to someone, whether that cash is actual physical bills, writing them a check, doing an electronic bank ACH transfer from your account to theirs, wiring money from your account to theirs, etc. Additionally, it’s also considered a gift if you pay something for someone even if don’t pay the person directly. For example, if your friend owes $100k on their mortgage and you decide to help them out and pay the mortgage off by sending $100k directly to their lender, that’s still considered a gift of $100k to your friend (not the lender), even though you never directly gave your friend the money.
Another example of a gift is giving someone securities like stocks, bonds or mutual funds. You can do this through an electronic transfer process between your brokerage account and theirs. But as you’ll see later in this article, you’ll want to consider the future tax implications of gifting securities as it relates to what happens to any unrealized gain or loss you have in the security when you gift it to someone. Spoiler alert – your cost or “basis” in the security you give typically transfers over and becomes the cost or “basis” in the hands of the gift receiver.
Yet another example of a gift is giving someone physical property, like a car or a house, where the actual gifting takes place once you formally transfer the deed or title to the recipient. But, like with gifting securities, there could be potential future tax implications for the gift receiver if/when they sell the gift, based on whether they’re selling it at a gain or a loss.
Gift (and estate) tax
Before getting more into gifts, gifting limits and so forth, it’s important to know why there are potentially limits and filing requirements around giving gifts. And I should mention I’m about to reference just federal rules around gifting and gift taxes. To my knowledge, most states don’t have limits or reporting processes around giving gifts, as most states don’t have any sort of gift tax that might come into play. But be sure to look into your state for more information.
At the federal level, the government doesn’t want people giving away too much of their wealth, whether in life or upon death (via leaving money and things to heirs after you pass). Or at least, if you do give away more than a certain amount during life and/or at death, there will be a “gift tax” and/or “estate tax” imposed.
This figure indexes each year for inflation but, for 2026, a person can give away up to $15,000,000 during their lifetime without having to pay tax on any of those gifts. It’s only if/when a person cumulatively gives away more than $15,000,000 that they need to start paying a federal gift tax on the amount of gifts in excess of $15,000,000. Furthermore, this $15,000,000 limit doesn’t include gifts that are below each year’s respective annual exclusion limit. But I’ll talk more about that in a bit.
And note that the receiver of the gift is never subject to paying the gift tax on gifts received. The gift tax burden, if any, is always on the gift giver. In other words, if you were to give me $20,000,000 cash right now, I wouldn’t have to pay tax on the receipt of that gift. You, however, would have to pay the federal gift tax on the amount in excess of your $15,000,000 lifetime gift limit. And by that way, thank you for such a generous gift! 😊
Separately, while the gift receiver doesn’t pay tax on the receipt of the gift, that doesn’t mean they won’t be subject to income tax on whatever happens with the gift after they receive it. For example, again assume you give me $20,000,000 today. That’s all tax-free to me upon receipt. But if I put that into a high yield savings account getting 3.5% interest, for example, the account will throw off about $700,000 of interest in the next year. That $700,000 of interest will be taxable to me, no different than any other interest I receive during the year. But again, the receipt of the initial $20,000,000 gift is not taxable income to me.
Anyway, let’s get back to the topic at hand. Recall I said the government doesn’t want people giving away too much of their wealth, whether in life or upon death. The $15,000,000 lifetime limit is a shared limit, that combines all of the gifts you made during life AND however much estate value you transfer upon your passing.
As an example, assume you’ve given away $5,000,000 during your life. That means you still have $10,000,000 of money you can give away before you start to be subjected to gift or estate taxes. If you were to die today, you’d still have $10,000,000 that you can give away at death. In other words, that means if your estate size at your passing were to be no more than $10,000,000, the money and stuff you leave to others won’t be subject to any federal estate tax (though like I mentioned before, check with your state to see if a state-level estate tax would apply).
Let’s assume you die with an estate worth $12,000,000. Since you only have $10,000,000 of limit left, the first $10,000,000 of your estate would not be subject to federal estate tax. But the other $2,000,000 would be. Specifically, the 40% federal estate tax rate would apply such that your estate would have to pay $800,000 in federal estate taxes on that $2,000,000.
Or conversely, let’s assume you did already give away $15,000,000 during life. And you’re still alive. And now you want to give another $2,000,000 to someone. Since you’ve already used up your $15,000,000 lifetime limit, you’ll have to pay gift tax on all the $2,000,000 of additional gift. And the gift tax rate is the same as the estate tax rate. Which means you’ll have to pay a 40% gift tax on $2,000,000, which is $800,000 of gift tax.
Furthermore, since you’ve already used up all your $15,000,000 limit during life, that means that any and all of your estate size will be subject to the 40% estate tax rate upon your passing. So if you die leaving behind an estate worth $1,000,000, your estate will have to pay 40%, or $400,000, in federal estate taxes.
One final comment on the lifetime exemption amount; it’s per person, not couple. Which means for a married couple, each person can give away up to $15,000,000 (for 2026) in life or death. Or in total, the couple can collectively give away up to $30,000,000.
Annual gift exclusion
Thankfully, not all gifts actually use up your lifetime exemption of $15,000,000 (which again is indexed with inflation and will increase a bit each year under current tax legislation. And, speaking of tax legislation, be sure to read to the end for more insight about how legislative changes can alter the lifetime exemption amount).
Specifically, the IRS allows people to gift up to a certain amount each year to as many recipients as they want, and it won’t count toward using up the lifetime limit. For 2026, the annual exclusion amount is $19,000 per recipient. This figure is also indexed with inflation and will increase over time (but is also similarly subject to potentially change with future legislative changes).
For example, if you give me $19,000 of cash right now, it rightfully and legally stays completely off the radar. You don’t need to report it to anyone, it doesn’t use up any of your lifetime limit, it’s not taxable to you or me (again, gifts are never taxable to the recipient anyway), etc.
However, let’s assume you give me $19,000 now and then later in the year give me your car worth $30,000. Your total gifts to me for this year would then be $49,000, which is in excess of the $19,000 annual exclusion. So then what happens??? You need to file a Form 709 gift tax return.
I’ll talk more about gift tax returns later. But for now, the quick and dirty is that they aren’t nearly as scary as people assume. And having to file a Form 709 shouldn’t prevent you from making a gift you would have otherwise made. Though there are some methods to potentially tweak the way you give your gift to avoid having to file a Form 709. More on that later.
Anyway, in this example, the first $19,000 you gave me is your annual exclusion and doesn’t eat into your $15,000,000 lifetime limit at all. But the additional $30,000 worth of car does eat into your lifetime limit. And that triggers you having to file a Form 709 for this year.
Before moving on, I want to point out that it doesn’t matter if you give cash, securities, physical property, etc.; it all counts toward your annual exclusion and/or lifetime limit. Whether you would have given me $19,000 of cash and $30,000 worth of car or just $49,000 of cash, it’s all ultimately $49,000 of gift just the same. The only real difference is how you ultimately report it on Form 709. On that form, you have to detail what you gave, what its value was, what its basis was, etc.
Cash is cash, and that’s obviously straightforward to account for and value. Marketable securities such as publicly traded stocks are also pretty straightforward, as they have publicly observable prices to determine their “fair market value” at the time of the gift. Giving things like cars is a little more involved, as you need some sort of defensible means of determining the car’s fair market value. Generally speaking, you can use well-known reputable automobile valuation services like Kelley Blue Book or Edmunds.
Spousal exclusion
Married couples have special exclusions for making gifts to one another. Specifically, there is no limit or reporting requirements around spouses gifting money or things to each other.
Assume you give your spouse a $50,000 piece of jewelry this year. Or buy them a $60,000 car with your own money (as opposed to jointly owned money). Those gifts obviously exceed $19,000. However, because it’s your spouse you’re gifting to, there are no reporting requirements, no Form 709 filing requirement, no gift taxes involved, etc. Even if you give your spouse $30,000,000 this year, it doesn’t matter; you don’t have to report that, neither of you pay taxes on that gift, etc.
Separately, married couples want to pay attention to how much estate size each might end up with at death. As such, making exceptionally large gifts between spouses might have unwanted estate tax implications. But I won’t get into that here, as that’s a whole separate can of worms. This article is focused more on gifting during life as opposed to gifting after death (i.e. leaving things to other upon your passing). But the only thing I’ll mention for now is that a surviving spouse can assume and take over their deceased spouse’s unused lifetime exemption. For example, assume Spouse A gifted $5,000,000 to people other than Spouse B during their life. That means Spouse A has $10,000,000 of lifetime exemption left. Spouse B can take Spouse A’s unused $10,000,000 lifetime exemption and add it to their own $15,000,000 thereby giving Spouse B $25,000,000 of lifetime exemption they can use up in giving gifts during their life and/or leaving estate value to others upon their death.
Other exclusions
There are a few other noteworthy gift exclusions that don’t eat into your lifetime exemption and don’t require filing a Form 709 gift tax return. They are:
- Gifts to political organizations
- Gifts to certain exempt organizations
- Gifts to pay qualifying tuition on behalf of others
- Gifts to pay qualifying medical expenses on behalf others
For more information about each of the above four exclusions, please refer to the IRS’s Instructions for Form 709. But to summarize:
Gifts to political organizations – I frankly never really looked into what exactly this means or what organizations qualify, but any gifts to a “political organization” as defined in Internal Revenue Code (the U.S. tax code, or the “IRC”) section 527(e)(1) are exempt from using your lifetime exemption or needing to be reported on Form 709
Gifts to certain exempt organizations – I’m even less sure what this means, but gifts given to any of the below are exempt from using your lifetime exemption or needing to be reported on Form 709:
- Civic leagues or other organizations defined in IRC section 501(c)(4)
- Labor, agricultural, or horticultural organizations defined in IRC section 501(c)(5)
- Any business league or other organization defined in IRC section 501(c)(6) for the use of such organization, provided that such organization is exempt from tax under IRC section 501(a)
Gifts to pay qualifying tuition on behalf of others – If you want to help a friend or relative pay for school by paying for some or all of their tuition, you can pay up to their full tuition amount without it eating into your lifetime exemption or needing to be reported on Form 709 IF you pay the money directly to the institution, not to your friend.
For example, if your grandchild is attending college where the tuition is $40,000 for the year, you can directly pay the school $40,000 to pay your grandchild’s tuition and it would not use up any of your lifetime exemption and would not need to be reported on Form 709. However, if you instead give your grandchild $40,000 for them to in turn pay the school, that would then be a reportable gift (where the first $19,000 would be your annual exclusion, and the remaining $21,000 would eat into your $15,000,000 of lifetime exemption), and you would need to file a Form 709 for that year. Refer to the above IRS link for Form 709 instructions for more detail about this exclusion.
And in case you’re wondering if this exclusion applies only to higher education institutions or if it also applies to K-12 institutions, I’m frankly not sure. The tax code doesn’t appear to say it is limited to higher education. And in the research I’ve done, I haven’t found anything definitive saying it does not apply to K-12. So I leave it to you to research on your own, or get the opinion of your tax professional.
Gifts to pay qualifying medical expenses on behalf others – just like you can pay tuition on behalf of others without it being reportable if you directly pay the school yourself, a similar exclusion applies if you pay medical expenses for others if you pay the facility or institution directly. If you instead give a friend cash to have them pay their medical bills, this special exclusion will not apply and then you’d be subject to the normal $19,000 annual exclusion and reporting requirements. Again, refer to the above IRS link for Form 709 instructions for more details about this.
Ways to not cross over the annual exclusion (and not trigger the requirement to file a Form 709)
This section will talk about some common ways to potentially avoid having to file a gift tax return and still achieve the gifting amounts you want to achieve; by maximizing how much you give without exceeding the year’s annual exclusion amount. I should again add that having to file a gift tax return really isn’t a big deal, so it’s not like it’s something that should be avoided at all costs. But if it’s possible to get around having to go through the minor nuisance and filing process and still meet your giving needs, why not!?
Straddle calendar years – Let’s assume you want to gift one person $30,000. And it’s near the end of the year, and you haven’t already gifted them anything this year. If you want to not exceed giving them $19,000 in one calendar year, you can give them $19,000 now and then wait until January to give them the other $11,000. This obviously assumes the person can wait until January to get the rest of the $30,000. If they can’t, then this won’t work.
Gift to multiple different recipients – Suppose you have a child and that child is married. And you want to collectively give them a total of $30,000. If you were to give a single check to your child for $30,000, it would be treated as though you gave just your child $30,000; none of it would be viewed as having been given to their spouse. This would be true even if the check was deposited into your child’s joint bank account where that account is shared/owned with their spouse.
In the eyes of the IRS, a gift can only have one giver and one receiver. In other words, as far as the IRS and gifting rules are concerned, there is no such thing as two people jointly giving a gift, or two people jointly receiving a gift. That’s why, in the case above, it would be viewed as a single gift of $30,000 from you to just your child. And that would therefore be over the $19,000 annual exclusion and you’d have to file a gift tax return.
To easily get around exceeding the $19,000 exclusion amount, you can simply split the gift into two different checks; one payable to your child, and one payable to the spouse. So long as neither check exceeds $19,000, you will not need your annual exclusion to either person. And this holds true even if they deposit both checks into a joint account. This also assumes you didn’t previously give either person anything during the year. Again keep in mind the annual exclusion applies to all gifts given in aggregate to one person for the year; it doesn’t apply separately to each gift given to a person during the year.
As you can see, the exclusion rules are kind of silly. It’s fine if you write two checks for $15,000 each to your child and their spouse. But writing one check for $30,000 to just one of them – even if it gets deposited into their joint account – would trigger having to file a gift tax return.
And the same process above would hold true if you were giving things other than cash, too. Such as gifting securities. Let’s assume you want to gift $30,000 worth of stocks to your child and their spouse. If you do a single transfer of $30,000 worth of stocks to their joint brokerage account, it would be a single gift of $30,000 to just one of them. But if you break it up and do two transfers for $15,000 each, you’d be under the annual exclusion limit for both receivers.
Spouses can divvy up gifts (this is different than formally “splitting” gifts) – Recall I said above that there is no such thing as two people jointly giving a gift (or two people jointly receiving a gift). This means if spouses want to give money to people, they might want to split up the transaction into multiple pieces to avoid exceeding the annual exclusion amounts.
For example, assume you and your spouse want to collectively give your child $30,000 cash. And you want to do so by writing a check from a joint bank account that you and your spouse own. If you write a single check for $30,000 to your child, that will be a single gift from just one of you to your child. Which means one of you will have exceeded your annual exclusion of $19,000 and will need to file a Form 709.
It’s goofy, I know. Even though the account from which you wrote the check is a joint account, the IRS doesn’t automatically treat it as if half of that check was from you and the other half was from your spouse. Basically, whoever signs the check is deemed the sole giver of the $30,000 in this case. And the same applies if you transfer securities from a joint account to your child. If you and your spouse have a joint brokerage account and want to transfer/gift $30,000 worth of securities to your child’s brokerage account, you’d have to break it up into two different transfers of each below $19,000 worth of securities to avoid having to file a gift tax return.
Separately, there is formally something called gift “splitting” among spouses. Using the example above, one spouse could write a single check for $30,000 to their child and they can have it such that neither spouse would exceed their annual exclusion of $19,000 or use up any of their lifetime exemption of $15,000,000. HOWEVER, in order to split an otherwise singular gift, filing a Form 709 is required to tell the IRS to treat the gift as having been split. Hence, if you’re trying to avoid filing a gift tax return, it’s better to actually literally split the gift when you give it (by writing two smaller checks instead of one larger check) as opposed to writing a larger single check and then doing the formal gift splitting designation on Form 709.
Combining different recipients and different givers – If you’re married and want to help out your child and their spouse (or your grandchildren, too), you and your spouse can potentially gift your child’s household a lot of money in a given year, while still staying under all annual exclusions.
For example, assume your child is married. And you and your spouse want to give your child and his spouse as much as possible, but you want to avoid having to file a gift tax return. In 2026, you can give them up to $76,000 without exceeding any annual exclusion amounts. Specifically, you can give your child $19,000, you can give your child’s spouse $19,000, your spouse can give your child $19,000 and your spouse can give your child’s spouse $19,000. That’s a total of $76,000 that can be gifted from your household to your child’s household, all without exceeding any annual exclusions and without requiring a gift tax return.
And then if your child has children of their own, you and your spouse can also each give each grandchild $19,000. Depending how many children your child has, the amount of household-to-household gifting can really add up, all without exceeding each year’s annual exclusion amount.
Form 709 (“gift tax return”)
Okay, finally we’re on to the dreaded Form 709. I say that tongue in cheek, because the form is far from something to dread. So don’t let it stop you from giving a gift of the size you want to give. Again, if you can stay under the annual exclusion limit and avoid filing Form 709 without meaningfully impacting your giving, why not. But if you can’t, don’t let the idea of filing a gift tax return stop you.
Like I mentioned above, unless you’ve already given away $15,000,000 in your lifetime, you’re not going to have to pay any taxes on gifts you give. And always keep in mind the gift receiver never has to pay tax on gifts received, regardless how large the gift is. Furthermore, the gift receiver never has to file anything to report the gift. The onus is always on the gift giver to file the Form 709 if/when needed.
And keep in mind the $15,000,000 lifetime limit does not get reduced by any gifts you give that are under the annual exclusion. For example, assume the annual exclusion never changes and stays at $19,000 per year forever. I can gift each of my kids $19,000 per year for 10 years, which would be total gifts of $380,000 to the two of them over those 10 years. Because each year’s gifts didn’t exceed the annual exclusion, none of that $380,000 of total gifts eats into my lifetime limit.
Anyway, assuming most of you reading this will never give away more than $15,000,000 during your life (or at death), the gift tax return for you is ultimately nothing more than a way of tracking how much, if any, of your lifetime limit you’re using up. That’s it. Granted, it’s a tracking method that you need to send to the IRS (instead of just keeping record of on a spreadsheet or notepad in your house), but it’s nonetheless ultimately just a form telling the IRS how much of your lifetime exemption you’ve thus far used up.
And technically, the way the form works is that you get a tax credit toward gift taxes you’d otherwise have to pay. Meaning, you won’t see anywhere on there something like, “your lifetime limit is $15,000,000 and you’ve thus far given away $500,000 of that, leaving you with $14,500,000 of remaining limit.”
Instead, if filing a 2026 Form 709 for example, it will show you that you started with a total gift tax credit of $5,945,800. And it will calculate how much the tax is on the amount of gift you give for the year that exceeds the annual exclusion. And you will use up some of your credit on 2026’s gift such that you’ll have less total tax credit left going forward.
If you’re wondering where $5,945,800 comes from, that’s simply what the total gift tax would be in 2026 on $15,000,000 of gifts if there was zero lifetime exemption. Federal gift tax rates are a graduated/marginal structure where the gift tax is 18% on the first $10,000 of gifts, 20% on the next $10,000, 22% on the next $20,000, etc. all the way up to the top marginal gift tax rate of 40% on cumulative gifts in excess of $1,000,000.
So, like I said above, instead of the IRS viewing it as you being able to give $15,000,000 of gifts without tax, they actually view it as they’re giving you a tax credit on what gift taxes would be on the first $15,000,000 of gifts. Which makes it a bit less intuitive for people to digest. But such is the IRS. Nonetheless, that doesn’t stop the rest of the industry and folks like me from explaining it as $15,000,000 of lifetime gift exemption as opposed to $5,945,800 of lifetime gift tax credit; because it’s easier to understand it when viewing it as a limit on gift size as opposed a credit on gift taxes.
Anyway, filling out Form 709 is pretty straightforward, especially if you do it electronically using tax prep software. However, I was recently informed that most (all?) consumer-facing tax prep software does NOT have the ability to generate Form 709. Commercial tax prep software does though (which admittedly isn’t helpful if you’re trying to avoid having someone do the return for you).
If you do indeed grind out the form by hand, it will be a bit more work and thought than doing it electronically, namely because of the way the gift tax credit and usage is calculated and reported, as mentioned above. Whereas if you do the form in software, the calculations will all be done for you.
The form doesn’t require much information thankfully. You’ll have to put in some basic info about yourself such as name, SSN, address, state of residence and country of citizenship. Then there are some rather self-explanatory checkboxes to fill out, such as whether you previously filed a 709, if you filed an extension for the 709 or if the 709 is amended.
Schedule A of Form 709 is where you enter the name and address of the gift receiver, their relationship to you, a description of the gift, the date of the gift and the amount of the gift. You’d also enter in your basis of the gift, such as in the case of giving a security.
And then the “Tax Computation” part of the form is where it will show what the tax on the gift would be. But it also shows what your lifetime credit is. And to the extent your remaining credit exceeds the calculated gift tax for the year, you won’t owe any gift tax; you’ll just use up more of your lifetime credit.
Then you sign, date and file it. That’s really about it. And even better, starting with 2025 709’s you can e-file them through tax preparers or tax prep software. Prior to 2025, 709’s were only able to be filed manually…on paper…via snail mail.
The filing deadline for Form 709 is April 15 of the year after the year of the gift; just like with your normal tax return. However, Form 709 is a completely different form/process, and gets filed separately from your 1040 tax return.
And, like with your normal tax return, there is also a process to get an automatic 6-month extension to file your Form 709. Specifically, you’d use Form 8892 (Application for Automatic Extension of Time To File Form 709…) to get the extension.
One final comment about Form 709. And I was reluctant to mention it because I don’t want you to think you shouldn’t file a 709 when you’re required to. But, as far as I can interpret the penalties around not filing a Form 709 or filing it late, there isn’t technically a penalty for not filing one so long as you don’t actually owe any gift tax.
The penalties related to not filing Form 709, or filing it late, are based solely on the amount of gift tax owed with the return. Therefore, if there is no gift tax actually owed, then there isn’t actually any penalty for not filing the form. Or at least that is my reading of it. But you didn’t hear that from me. The proper answer and takeaway is that if you are required to file a Form 709, file it. And file it on time. Again, it’s not a very onerous process to file. It’s really not much more than a minor nuisance, in my opinion.
So file the forms. Period.
Gift splitting
As I touched on before, spouses are able to “split” gifts. That’s when one spouse gives a gift, but then both spouses agree to “split” the gift to treat it as if half of it was from Spouse A and the other half was from Spouse B. But in order to formally split a gift this way, you’re required to file a gift tax return, as that’s what informs the IRS of the split.
So, like I said above, if you’re trying to avoid filing a Form 709, avoid this route of gift splitting. Even if the post-split gift results in each spouse’s share being below the annual exclusion, you’ll still nonetheless need to file a 709 to report the split. Neither spouse will use up any of their $15,000,000 lifetime exemption, but the 709 still needs to be filed to report the split.
However, the above treatment applies to gift splitting amongst spouses is non-community property states. I believe that if spouse in community property states choose to gift community property (not separate property), the gift is by default treated as being split WITHOUT needing to file Form 709.
For example, in a non-community property state, if Spouse A gifts $30,000 to their child and does not want to exceed their annual exclusion, they will need to file Form 709 to formally split the gift with Spouse B, to treat it as if the gift was actually $15,000 from each spouse.
On the other hand, if the same example was in a community property state and the $30,000 was deemed community property of both spouses (not separate property of just one spouse), then no Form 709 would be required as that gift would default to automatically being split and treated as being $15,000 from each spouse.
Transfer of basis of gifted securities or property
I talked above about transferring securities as gifts to people. The fair market value of the securities on the day of the gift (technically it’s the average of the security’s high and low price during that day) is what’s used to determine the value of the gift and therefore how much of your annual exclusion and/or lifetime exemption is used up by the gift. Such as donating stock with a current value of $30,000 to your child. That is $30,000 worth of gift.
But what about the basis of the gift and what happens when your child eventually sells the shares? The long and short of it is that your child’s basis in the gifted shares is determined by your original basis and the fair market value of the shares on the day of the gift.
Unlike with leaving securities to people at your death, where the securities get a “step-up in basis” such that the heir inherits the shares as if the price they paid for them was the price of the shares on the date of your death, there is no step-up in basis with gifting securities during life.
The most common situation with gifting securities is that the shares are appreciated beyond the original owner’s basis. Which means the fair market value of the shares at the time of the gift is more than the gift giver’s basis. This is a pretty simple scenario; in this case, the basis for the gift receiver is the same basis the gift giver had. If/when the gift receiver sells the shares, they will determine any realized gain or loss compared to the gift giver’s basis.
It’s a bit more involved when the fair market value of the shares at the time of the gift is less than the gift giver’s basis. But to summarize:
If the gift receiver sells the shares for more than the gift giver’s original basis, the gift receiver will use the gift giver’s basis to determine the realized gain or loss.
If the gift receiver sells the shares for more than the fair market value of the shares at the time of the gift but less than the gift giver’s basis, the gift receiver uses that selling price as their basis, thus resulting in no net realized gain or loss.
If the gift receiver sells the shares for less than the fair market value of the shares at the time of the gift, they will use the fair market value of the shares at the time of the gift as their basis, thus resulting in a net realized loss on the sale.
The above analysis of basis and fair market value applies the same to other property, such as gifting real estate, and the gift receiver later selling the real estate.
One final note about gifting property or securities, especially when the gift receiver sells it at a gain; beware of the “kiddie tax.” Without going into too much detail, the kiddie tax is a way to prevent adults from arbitraging tax rates by gifting appreciated assets to children or certain dependents to then have the children or dependents sell the assets and realize the gain. The angle is that the child or dependent would be in a lower tax situation than the adult, so giving/shifting the unrealized gain to the child or dependent to sell would mean they pay less tax on the sale than the adult would. Well, the IRS is on to that. Long story short, if children or certain dependents how more than a trivial amount of unearned income (such as realizing gains from selling appreciated assets), some or all of the gain would be taxable at the parent’s rate; not the child’s rate. This is the “kiddie tax.” For more information on it, check out IRS Topic 533.
Tax legislation can change all of this
So far I’ve been talking about the lifetime exemption being $15,000,000 for 2026. And that it will go up each year with inflation. That’s true…for now. Like any part of the tax code, it’s always subject to change as tax legislation is routinely revised as political powers and priorities change in Washington.
The current $15,000,000 per person lifetime exemption is the highest it’s ever been. And it’s been rather high ever since the Tax Cuts and Jobs Act increased it to $11,180,000 in 2018, from less than half of that in 2017.
However, it’s possible the lifetime exemption amount could decrease. Potentially dramatically so. For example, if not for the One Big Beautiful Bill Act that was signed into law in 2025, the lifetime exemption under the Tax Cuts and Jobs Act was temporary, and was set to get reduced to roughly $7,000,000 per person in 2026. It’s the One Big Beautiful Bill that made the exemption the current $15,000,000, starting in 2026.
And if looking back 20 years (which wasn’t that long ago), the lifetime exemption was substantially smaller. In 2006, it was only $2,000,000 per person. And in 2002, it was only $1,000,000 per person!
This isn’t to say that I expect the lifetime exemption will necessarily get back to as small as it was a couple of decades ago. But I think it’s fair to assume it could very well get materially decreased at some point in the future. At $15,000,000, gift and estate tax is effectively a non-issue for the vast majority of people. But if the lifetime exemption were to get reduced to $5,000,000 or less, for example, then a non-trivial amount of people would be impacted by it.
So, what’s my point with talking about legislative hypotheticals??? I’m honestly not sure. I guess other than to say don’t take the current high lifetime exemption for granted. And file your Forms 709 accordingly (when needed) to make sure you’re properly tracking your usage of your lifetime exemption. Because someday, it might actually matter for you.