United States
Hong KongThe gift tax: annual exclusion, unified credit and what is not a gift
The 2026 annual exclusion is USD 19,000 per donee, doubled where spouses split gifts. Amounts above it use the lifetime exclusion of USD 15 million. Direct payments of tuition and medical expenses are unlimited and excluded entirely.
A tax almost nobody pays, and a set of rules that decide how much lifetime exclusion remains for the estate.
The annual exclusion
USD 19,000 per donee per year in 2026. Per recipient, not in total - a client with four children and their spouses can give to eight people.
Gift splitting lets a married couple treat gifts as made half by each, doubling the effective exclusion. It requires consent and a gift tax return even where no tax is due.
The exclusion applies only to gifts of a present interest. A gift into a trust the beneficiary cannot access is a future interest and does not qualify - which is why Crummey withdrawal powers exist, giving the beneficiary a temporary right to withdraw and converting the gift to a present interest.
What is not a taxable gift at all
- Tuition paid directly to the institution, with no limit.
- Medical expenses paid directly to the provider, with no limit.
- Gifts to a spouse who is a US citizen, unlimited.
- Gifts to qualifying charities.
- Gifts to political organizations.
Directly is the operative word in the first two. Giving the money to the student to pay tuition is an ordinary gift; paying the university is not a gift at all.
That is one of the most useful and least used techniques in the domain, and grandparents funding education should generally be told about it.
Paying a grandchild's tuition directly does not use the annual exclusion, so the same grandparent can also give USD 19,000 in cash in the same year. Questions test whether you know they are separate.
The unified credit
Gift and estate tax share one lifetime exclusion - USD 15 million in 2026. Taxable gifts above the annual exclusion use it during life, reducing what remains at death.
A gift tax return is required for gifts above the annual exclusion, for split gifts, and for gifts of future interests, even where no tax is payable. Filing is how the exclusion used is recorded.
Why gift rather than bequeath
Future appreciation moves out of the estate. Annual exclusion gifts use no exclusion at all. And the gift tax is tax exclusive while the estate tax is tax inclusive, which favors lifetime giving for a taxable estate.
Against that: the donee takes a carryover basis rather than a step-up. At a high exclusion, that argues for holding appreciated property until death and gifting cash or high-basis assets instead.
The transfer tax exclusion was changed by the 2025 reconciliation act and is indexed thereafter. Confirm the current figure before relying on it, and check state law separately.
Common questions
What is the annual gift exclusion?
USD 19,000 per donee in 2026, doubled to 38,000 where spouses split gifts. It applies per recipient rather than in total.
What gifts are not taxable at all?
Tuition paid directly to the institution and medical expenses paid directly to the provider, both unlimited, plus gifts to a US citizen spouse, to charities and to political organizations.
Does paying tuition use the annual exclusion?
No. Direct tuition payments are a separate exclusion, so the same donor can also give the annual exclusion amount in cash to the same person in that year.
When is a gift tax return required?
For gifts above the annual exclusion, for split gifts, and for gifts of future interests - even where no tax is payable, because filing records the exclusion used.
Is it better to gift or to bequeath?
Gifting moves future appreciation out of the estate, but the donee takes carryover basis rather than a step-up. At a high exclusion that argues for gifting cash or high-basis assets and holding appreciated property.