H2R CPA Blog

The Power of Annual Gifting

Annual gifts can be a powerful tool for trimming down a future estate. When structured correctly, they can pass to recipients without triggering gift taxes, thanks to the annual exclusion as well as the separate exclusions for qualified education and medical expenses.

Annual Gift Tax Exclusion

For 2026, the Federal annual gift tax exclusion is $19,000 per recipient. This means you may give up to $19,000 to as many individuals as you want to in 2026 without incurring Federal gift tax liability provided certain criteria are met. If you are married, you and your spouse may each give $19,000 per recipient (total of $38,000 per recipient).

The annual exclusion applies to gifts that are present interest. A gift is considered a present interest if the recipient has all immediate rights to the use, possession, and enjoyment of the property or income from the property being given. If a present interest gift is more than the annual exclusion amount, your lifetime exemption will be reduced, and gift tax may be due if you have used all your lifetime exemption.

Gifts of future interests cannot be excluded with the annual exclusion. A gift is considered a future interest if the recipient’s right to use, possession, and enjoyment of the property or income from the property will not begin until some future date. Gifts in trust are typically considered future interest unless the beneficiary has a present right to withdraw or enjoy the property. Future interest gifts will reduce your lifetime exemption, and gift tax may be due if you have used all your lifetime exemption.

Noteworthy Details

  • Gifts made to spouses who are not U.S. citizens have a 2026 annual exclusion amount of $194,000.
  • Keep in mind smaller gifts you may give during the year to a recipient such as birthday, anniversary, and wedding are considered in the total gifts to the recipient.
  • The annual exclusion is use or lose; therefore, unused amounts will not be carried forward to future years.
  • If making gifts by check, make sure the recipient deposits the check within the same calendar year the gift is given.

Exclusion for Educational and Medical Expenses

Any amount paid on behalf of an individual directly to a qualifying domestic or foreign educational organization as tuition for the education or training of the individual is not treated as a transfer by gift. Tuition does not include payments for books, supplies, room and board, or other similar expenses that are not direct tuition costs. Also, contributions to qualified tuition programs (typically 529 plans) do not qualify for the educational exclusion.

Any amount paid on behalf of an individual directly to a person or institution that provides medical care is not treated as a transfer by gift. Medical care must meet the same type of expenses that are deductible for income tax purposes. Medical care includes expenses incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, or for the transportation primarily for and essential to medical care. Medical care also includes health insurance payments made on behalf of the individual.

Noteworthy Details

  • It is important to remember the payments must be made directly to the educational organization or medical provider. The exclusions do not apply if the payment is made to the individual, who then submits payment to the educational organization or medical provider.
  • Reimbursements from the educational organization or medical provider to the individual do not qualify for the exclusion.

Estate and Gift Tax Lifetime Exemption

The 2026 Federal estate and gift tax unified lifetime exemption is $15,000,000. As a result of the One Big Beautiful Bill Act (OBBBA), the exemption amount is now permanent and will be adjusted annually for inflation. The exemption is applied first to taxable gifts made during your lifetime, and any remaining exemption can be used to offset Federal estate tax at death.

Pennsylvania Considerations

Under current law, Pennsylvania does not have a gift tax. However, gifts made within one year of the date of death are included for Pennsylvania Inheritance tax purposes to the extent they exceed $3,000 per recipient.

Reach Out to Learn More

If you have questions about your specific situation or would like assistance with your gifting strategy, feel free to contact your H2R CPA liaison and they will be happy to assist you.

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