Federal estate and gift tax basics

The federal government taxes large transfers of wealth, both gifts made during life and property left at death. The two taxes are designed as one system with a shared lifetime allowance. That allowance is high enough that most households never owe either tax, yet the reporting rules can still apply to ordinary families. This post explains how the pieces fit.

How the estate tax works

The IRS describes the estate tax as a tax on your right to transfer property at your death. The calculation runs in stages:

1. Gross estate. Everything the person owned or had certain interests in at death, at fair market value. The IRS lists cash and securities, real estate, insurance, trusts, annuities and business interests. Retirement accounts are generally included as well.
2. Deductions. These may include mortgages and other debts, estate administration expenses, and property passing to a surviving spouse or to qualified charities.
3. Lifetime gifts. Taxable gifts made during life are added back.
4. Credit. The resulting tax is reduced by a credit tied to the basic exclusion amount.

The practical effect is that only the portion of an estate above the exclusion is exposed to tax. The Form 709 instructions put the top rate for gifts at 40%, and the estate tax uses the same rate schedule.

The basic exclusion amount

The basic exclusion amount is the total a person can transfer, during life and at death combined, before federal estate or gift tax applies. The IRS publishes it by year of death:

The 2026 figure comes from the 2025 tax law, Public Law 119-21, which the IRS notes increased the basic exclusion amount to $15,000,000 for 2026. The IRS had not listed a 2027 figure on these pages as of this writing; the table on the estate tax page is where new figures appear.

An estate tax return, Form 706, is generally required when the gross estate plus adjusted taxable gifts exceeds the same amount. The IRS notes that most relatively simple estates do not require a return.

Married couples and portability

Two rules make the system more generous for married couples.

First, property that passes to a surviving spouse is generally deductible from the taxable estate, and gifts to a spouse are generally not taxable gifts. Different limits apply when the spouse is not a U.S. citizen.

Second, a rule called portability lets the estate of the first spouse to die pass any unused exclusion to the surviving spouse. This is not automatic. The election is made on a timely filed estate tax return, and the IRS's estate tax FAQ states that a return must be filed to elect portability regardless of the size of the gross estate. The return is due nine months after the date of death, with a six-month extension available.

How the gift tax works

The gift tax applies to transfers made during life for less than full value. The IRS states the general rule that any gift is a taxable gift, then lists the main exceptions:

• gifts that are not more than the annual exclusion for the calendar year,
• tuition or medical expenses paid for someone,
• gifts to a spouse, and
• gifts to a political organization for its use.

The annual exclusion

For 2026, the annual exclusion is $19,000 per recipient, the same as for 2025. It applies to each person separately. Each spouse has their own exclusion, so the IRS table shows a total of $38,000 per recipient from two spouses for 2026.

Tuition and medical payments

The educational and medical exclusions are separate from the annual exclusion and have no dollar cap, but the payment has to be made the right way. The Form 709 instructions say a tuition payment must be made directly to the educational organization and must be for tuition, not books, supplies or room and board. A medical payment must go to the care provider.

What happens when a gift exceeds the annual exclusion

Going over the annual exclusion generally triggers a filing requirement, not a tax bill.

A hypothetical illustration: suppose a parent gives an adult child $50,000 in 2026 toward a house.

• The first $19,000 is covered by the annual exclusion.
• The remaining $31,000 is a taxable gift that the parent reports on Form 709.
• That $31,000 is applied against the parent's lifetime exclusion. No gift tax is paid unless the parent's lifetime taxable gifts have used up the whole exclusion.

Form 709 is generally due by April 15 of the year after the gift.

Estate and gift tax are not income tax

These taxes are separate from income tax. The IRS notes that making a gift or leaving an estate to heirs does not ordinarily affect federal income tax, and gifts are not deductible unless they are charitable contributions.

Income tax does come back in when the recipient sells the property, and the two kinds of transfer are treated differently:

• Gifted property generally keeps the giver's basis, meaning the original cost used to measure gain. In the IRS example, stock bought at $10 a share and given away, then sold by the recipient at $100, produces a taxable gain of $90 a share.
• Inherited property generally takes a basis equal to its fair market value on the date of death.

Retirement accounts are a separate case: beneficiaries pay income tax on taxable withdrawals. See inherited IRA basics and receiving an inheritance.

State taxes and other limits

Everything above is federal. Some states impose their own estate or inheritance taxes with their own thresholds. A separate federal tax, the generation-skipping transfer tax, can apply to large transfers that skip a generation, such as gifts to grandchildren.

Because state rules and individual circumstances vary, an estate planning attorney or tax professional can advise on how these taxes apply to a specific situation. For how property actually changes hands at death, see what probate is.