Holiday Gifts the IRS Won't Tax
With the holiday giving season fast approaching, many high-net-worth clients may be interested in exploring gifting opportunities—and, of course, must consider the associated tax implications. Large gifts can trigger IRS tax reporting obligations even if the gift does not approach the generous lifetime transfer tax exemption amount (now made permanent by the One Big Beautiful Bill Act). What many clients don't realize is that the IRS has carved out come categories of gifts that are entirely tax-free. These exceptions exist regardless of the size of the gift. For clients with large gifting objectives, steering gifts into the exempt categories can be valuable from a tax perspective. With proper structuring, it can be possible for clients to accomplish some of their estate planning objectives during life—and without generating any transfer tax liability.
Federal Gift Tax Rules: The Basics
When a client transfers cash or property to another person, as the donor, they're responsible for paying any associated gift tax. When the gift tax is triggered, the donor must file Form 709 with the IRS to report the gift. That said, it's often possible to structure gifts to avoid any tax liability at all. Under federal law, clients can make gifts valued at up to the annual gift tax exclusion amount without any tax liability or reporting obligations (the exclusion is $19,000 per recipient in 2026, or $38,000 per married couple).
Clients can make as many $19,000 gifts as they wish in 2026 without triggering any Form 709 reporting obligations. The key is that each recipient can receive gifts up to $19,000 in value. There is no limit on the number of recipients a client can choose to provide for in any given year.
When a client makes a gift that exceeds the annual exclusion amount to a single recipient, they will be required to file IRS Form 709 to report the gift—but they also have the opportunity to apply a portion of their lifetime transfer tax exemption amount to that gift. They don't always have to pay gift tax simply because they were required to file. Filing is really how the IRS keeps track of how much transfer tax exemption has been used up over a client's lifetime.
IRS Exceptions to the Gift Tax Reporting Rules
Certain categories of gifts are not subject to the annual limit. Of course, gifts between spouses are always exempt. Even large transfers between spouses are nontaxable if both spouses are U.S. citizens. A larger ($190,000 in 2026) exemption exists for non-citizen spouses).
An exception for tuition payments allows a client to pay another person's tuition as long as the tuition payment is made directly to a qualified educational organization. Most schools qualify—although the exception only exists for tuition, not for things like books or living expenses. The payments don't count toward the annual exclusion amount (so the client could pay a recipient's tuition directly to their school and still give them $19,000 to spend as they choose without filing Form 709). The key is that the tuition payment must be made directly to the school, not to the beneficiary.
Similarly, clients can pay someone else's medical expenses (in an unlimited amount) without any transfer tax obligations. The payment must be made directly to the medical provider—simply giving the amounts to the recipient and asking them to use the funds for medical expenses means the funds count toward the annual exclusion. The medical expenses must be qualified medical expenses under otherwise-applicable IRS rules.
Gifts to qualified charities are also not considered gifts for gift tax purposes (and may even be deductible for federal income tax purposes). However, it's important to pay attention to the recipient's qualified status. A gift to someone's private fundraiser is not treated as a charitable gift—so counts toward the annual exclusion even if the client has a charitable intent. Gifts to qualified political organizations are also not considered "gifts" (gifts to individual politicians are treated as gifts for IRS reporting purposes).
Conclusion
The tax laws governing gifts can be complicated—and, because clients can now transfer roughly $15 million tax-free over a lifetime post-OBBBA, reporting obligations are often overlooked. Clients interested in making generous gifts to grandchildren, relatives and friends may wish to consider the IRS' exceptions to avoid triggering those reporting obligations in the first place.
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