Year-End Gifting to Family: Annual Exclusion, 529s, and Appreciated Stock

The annual exclusion is $19,000 per recipient in 2026, and there is no limit on how many recipients you can have. Children, grandchildren, a niece, a friend: each one can receive up to $19,000 from you this year with no gift tax return. Each spouse has their own $19,000 exclusion, so a married couple can give $38,000 per recipient. When each spouse gives $19,000 from their own or joint funds, no election is needed. When one spouse's separate funds provide more than $19,000, the couple elects gift splitting on Form 709, which is required even when no tax is due. Gifts are not deductible for you and are not taxable income to the person who receives them. Confirm with your tax preparer how to title and document gifts that come from a joint account, since who made the gift drives the filing.

Gifts above the exclusion are not taxed in most cases. They use part of your lifetime exemption, which is $15 million per person in 2026, and they require a Form 709. Because the exemption is that large, most households in the $1.5 million to $5 million range will never owe federal gift tax. The form is a reporting requirement, not a bill. Arizona has no gift, estate, or inheritance tax, so there is no state layer on top. The exemption question matters less for the tax than for the planning, because dollars given away are dollars your own retirement plan no longer has.

Two kinds of payments sit outside the exclusion entirely. Tuition paid directly to the school and medical bills paid directly to the provider are unlimited and do not count against the $19,000, but only if the payment goes straight to the institution or provider. Reimbursing a grandchild who paid the bill does not qualify. This is the cleanest way to help with a large cost, and it can be done on top of a full annual exclusion gift to the same person. Ask the school or provider for the payment instructions and keep the receipt for your records.

A 529 plan contribution is a gift to the beneficiary and qualifies for the annual exclusion. A five-year election, made on Form 709, lets you front-load up to five years of exclusions at once: $95,000 per beneficiary in 2026, or $190,000 from a couple. The tradeoff is that any other gifts to that beneficiary during the five-year window use up exclusion too, so a large front-loaded gift can leave no room for a separate cash gift to the same grandchild. Arizona offers a state income tax deduction for 529 contributions, which makes a 529 attractive for Arizona residents. Your preparer can confirm the current deduction limit.

Timing is where year-end gifts go wrong. A gift counts in the year you give up control of it. An electronic transfer that posts by December 31 counts, and a check that clears by December 31 counts. A check mailed in the last week of December may not clear until January, which would push the gift into 2027 and waste a year of exclusion that you cannot recover. Deposit and clearing dates matter, not the date on the check. Treat about December 20 as the practical deadline for checks and transfers, and earlier for 529 contributions and brokerage transfers that need custodian processing time.

What you give matters as much as how much. A gift of appreciated stock passes your original cost basis to the recipient. That is called carryover basis. The shares do not get the step-up in basis they would receive if you held them until death, so gifting low-basis stock gives up the step-up for those shares. Usually the better gift is cash, or shares with a high basis, while you hold the heavily appreciated shares for the step-up. The exception is when the stock will be sold anyway and the recipient's tax rate is lower than yours. For loss stock, the basis rules are less favorable to the recipient, so selling the shares and gifting the cash is cleaner.

Two other rules deserve attention. If a young recipient receives appreciated stock, the kiddie tax can tax their gains at the parents' rate; it applies to children under 19 and certain students under 24, so confirm the rules with your preparer before gifting shares to a grandchild. And large gifts made within five years before someone applies for long-term care Medicaid, which in Arizona is ALTCS, can trigger a penalty period under the Medicaid look-back. That matters most for households with lower assets or real long-term care risk, and an elder law attorney should review any large gift in that situation.

Start by deciding what you can afford, not what the exclusion allows. The $19,000 limit is a tax rule, not a spending target. A couple with seven recipients could technically give $266,000 in one year, but that number says nothing about whether their retirement plan can lose that money and still hold up through a long life and a bad market. Run the gift against your plan under stress, using your spending guardrails and your long-term care funding plan, before you write a check.

Choose the asset next. For most retirees, the best gifts are cash from the portfolio, 529 contributions, and direct tuition or medical payments. If you want to gift securities, look at your taxable account lot by lot. High-basis shares can move to a child or grandchild without giving up much, while your most appreciated shares usually stay put for the step-up at death. If you hold shares at a loss, sell them, take the loss, and gift the cash. If a recipient is an adult child in the 0% long-term capital gains bracket, up to about $98,900 of taxable income for joint filers and $49,450 for single filers in 2026, a low-basis gift can sometimes be sold tax-free by them. Confirm before relying on it.

Then work backward from December 20. Decide recipients and amounts in early November, confirm 529 account numbers and custodian cutoffs, and send electronic transfers rather than mailed checks. If you are electing gift splitting or the five-year 529 election, tell your preparer now so Form 709 gets filed for the year. Keep a simple record of every gift: date, amount, recipient, and the asset. If a grandchild's school or a medical provider is involved, ask for direct payment instructions instead of reimbursing.

Consider an illustrative household: a married couple, 66 and 68, with a $3.2 million portfolio, three adult children, and four grandchildren. Their plan has a comfortable surplus. They give each child $15,000 ($45,000 total) and put $10,000 into a 529 for each grandchild ($40,000 total), a combined $85,000, about 2.7% of the portfolio. Each gift is under one person's $19,000 exclusion, so no gift splitting is needed. They also pay $12,000 of tuition directly to one grandchild's school, which does not count against any exclusion. If they had instead gifted $19,000 of stock with a $3,800 basis, the recipient would carry a $15,200 gain, roughly $2,280 of federal tax at a 15% rate, a gain the step-up would have erased at death. Illustrative only, not a recommendation.

• Mailing a check on December 28 and assuming it counts as a 2026 gift, when it may not clear until January and the exclusion for the year is lost.
• Gifting your most appreciated shares to a child, which hands over your low basis and gives up the step-up those shares would have received at death.
• Gifting stock that has fallen below your cost instead of selling it first, which leaves the recipient with less favorable basis rules for the loss and wastes a loss you could have used yourself.
• Writing a check to a grandchild for tuition instead of paying the school directly, which uses the annual exclusion instead of qualifying as an unlimited payment.
• Front-loading a 529 with the five-year election and then also giving that same grandchild a large cash gift, which can exceed the exclusion and require a Form 709 you did not plan for.
• Funding a $38,000 gift to one person from only one spouse's separate account without electing gift splitting on Form 709, which leaves the gift over that spouse's $19,000 exclusion.
• Making large gifts without checking the Medicaid look-back, then needing long-term care within five years when a penalty period could apply.