Inheritance & Gift Tax — Rates, Exemptions, and How to File (2026)

What Are Gift and Estate Taxes?

Gift and estate taxes are federal taxes on the transfer of wealth — whether during your lifetime (gifts) or after death (estate/inheritance). The US doesn't have a traditional "inheritance tax" at the federal level — instead, the estate tax is paid by the estate of the deceased, and the gift tax is paid by the giver.

However, six states do impose an inheritance tax on the recipient: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

The Annual Gift Exclusion

The simplest way to give money tax-free: the annual gift tax exclusion.

In 2026: $18,000 per recipient per year (or $36,000 if married and gift-splitting).

This means:

• You can give $18,000 to as many people as you want — no tax, no reporting
• A married couple can give $36,000/person/year
• Gifts under this limit don't count toward your lifetime exemption

Example: You have 3 children. You and your spouse can give each child $36,000/year = $108,000 total — zero tax, zero reporting required.

The Lifetime Gift & Estate Tax Exemption

Beyond the annual exclusion, there's a lifetime exemption that covers both gifts and your estate:

• 2026 exemption: $13.6 million per person ($27.2 million for married couples)
• Important: This exemption is scheduled to be cut roughly in half starting January 1, 2026 under the Tax Cuts and Jobs Act sunset — unless Congress extends it

Gifts above the annual exclusion eat into your lifetime exemption. You don't owe tax until you've exceeded it.

Federal Estate Tax Rates

If your estate exceeds the exemption, the tax is steep:

In practice, most estates owe 40% on amounts above the exemption.

Who Owes What?

Gifts

• Giver pays the gift tax (not the recipient)
• Gifts under $18,000/recipient/year: no tax, no filing
• Gifts over $18,000: file Form 709, but usually no tax owed (uses lifetime exemption)
• Recipient never owes income tax on a gift

Estates

• The estate pays estate tax before distributing to heirs
• Heirs receive assets with a stepped-up cost basis (huge capital gains benefit)
• Estates under the exemption (~$13.6M): no federal estate tax

State Inheritance Taxes

If you're in one of the six inheritance tax states, the recipient may owe state tax based on:

• Their relationship to the deceased
• The value of what they received
• State-specific exemptions (often much lower than federal)

How to Report Gifts — Form 709

You must file Form 709 when:

• You give more than $18,000 to any one person in a year
• You and your spouse elect gift-splitting
• You give a "future interest" gift (like certain trusts)

Filing Form 709

1. Complete Form 709 (United States Gift Tax Return)
2. File by April 15 of the year after the gift (same as income tax)
3. Report the gift amount above the annual exclusion
4. The excess reduces your lifetime exemption — usually no tax owed
5. Keep records of all gifts for estate planning purposes

Important: Cash, Check, or Wire

Unlike some countries, the US doesn't require a specific payment method for tax-free gifts. Cash, check, wire transfer, or even crypto — all qualify. But keep documentation for gifts over the annual exclusion.

Common Gift & Inheritance Scenarios

Parents Giving Money for a Down Payment

• Annual exclusion: $18,000/parent/year (or $36,000 from a couple)
• Above that: file Form 709, reduce lifetime exemption
• Mortgage lenders may require a gift letter confirming it's not a loan

Inheriting a House

• No income tax on the inheritance
• Stepped-up basis — your cost basis is the property's fair market value at death
• If you sell immediately, almost no capital gains tax
• Property taxes may reset (varies by state — California's Prop 19)

Receiving an Inheritance from Abroad

• No US income tax on foreign inheritances
• But: must report on Form 3520 if over $100,000
• Failure to file Form 3520 = 25% penalty on the unreported amount
• The foreign estate may owe taxes in its home country

529 Plan Superfunding

• You can front-load 5 years of annual exclusions into a 529 plan at once
• 2026: up to $90,000 per beneficiary ($180,000 if married)
• Great way to fund education and reduce your taxable estate

Estate Planning Strategies

Irrevocable Life Insurance Trust (ILIT)

• Life insurance proceeds go to the trust, not your estate
• Avoids estate tax on the insurance payout
• Must be set up at least 3 years before death

Grantor Retained Annuity Trust (GRAT)

• Transfer appreciating assets to a trust
• You receive annuity payments back
• If assets grow faster than the IRS "hurdle rate," the excess passes tax-free
• Popular with business owners and investors

Charitable Remainder Trust (CRT)

• Donate appreciated assets to a CRT
• Receive income for life or a term of years
• Remainder goes to charity
• Avoid capital gains, get a charitable deduction, and receive income

Annual Gifting Program

• Systematic annual gifts to children/grandchildren
• Stay under the annual exclusion: no filing, no tax
• Over time, transfers significant wealth out of your estate
• Combine with 529 plans, custodial accounts, or direct payments

Direct Payments (Unlimited Exclusion)

Two types of payments are completely exempt from gift tax — no annual exclusion needed:

• Tuition paid directly to an educational institution
• Medical expenses paid directly to the provider

You can pay $50,000 in tuition for a grandchild AND give them $18,000 — all tax-free.

Common Mistakes

1. Not filing Form 709 — even when no tax is owed, gifts over $18,000 must be reported
2. Forgetting Form 3520 — foreign inheritances over $100,000 require reporting; penalties are severe
3. Not keeping records — document all significant gifts for estate planning
4. Ignoring the stepped-up basis — heirs should know their cost basis reset at death
5. Missing the 2026 exemption sunset — if the TCJA sunsets, the exemption drops ~50%; plan now

How Freenance Can Help

Receiving an inheritance or large gift is often a life-changing financial event. Freenance helps you plan what to do with new wealth — whether that's paying off debt, investing, or building an emergency fund. Track your assets and plan your financial future in one place.

👉 Try Freenance for free and manage your wealth wisely.

FAQ

Do I owe income tax on money I receive as a gift or inheritance?

No, recipients generally don't pay federal income tax on gifts or inheritances received in the US. The gift tax is paid by the giver (if any is owed), and estate tax is paid by the estate before assets are distributed. However, future income generated by inherited assets is taxable.

What happens if I give someone more than $18,000 in a single year?

You must file Form 709 to report the gift, but in most cases you won't actually owe any tax. The excess simply reduces your lifetime exemption (~$13.6M in 2026). Tax only becomes due once you've used up the full lifetime exemption across all gifts and your eventual estate.

Do I have to report an inheritance received from a foreign relative?

Yes, if you receive more than $100,000 from a foreign person or estate, you must file Form 3520 with the IRS. You won't owe US income tax on the inheritance itself, but failing to file Form 3520 carries a steep 25% penalty on the unreported amount. The foreign country may impose its own taxes.

What is a stepped-up cost basis and why does it matter?

When you inherit assets, their cost basis is reset to the fair market value at the date of death rather than the original purchase price. This can eliminate decades of accumulated capital gains for tax purposes. If you sell shortly after inheriting, you may owe little or no capital gains tax.

Are payments for someone's tuition or medical bills considered taxable gifts?

No, direct payments made on someone's behalf for qualified tuition or medical expenses are completely exempt from gift tax and don't count against the annual or lifetime exclusion. The key is that the payment must go directly to the educational institution or medical provider, not to the individual.