Gift Tax

Part of the Taxation series • • [ edit] • project A gift tax is a transfer tax imposed on certain transfers of a gratuitous nature where there is no consideration or the transfer is for less than market value. In other words, people may be taxed for giving gifts. There are parameters over why and when someone may be taxed for giving a gift. The person giving the gift is taxed, and generally not the person receiving the gift. In the United States, the gift tax is governed by Chapter 12, Subtitle B of the Internal Revenue Code. The tax is imposed by section 2501 of the Code.^[1]

Generally, if an interest in property is transferred during the giver's lifetime (often called an inter vivos gift) then the gift or transfer would not be subject to the estate tax. In 1976, Congress unified the gift and estate taxes limiting the giver’s ability to circumvent the estate tax by gifting during his or her lifetime. Notwithstanding, there remain differences between estate and gift taxes such as the effective tax rate, the amount of the credit available against tax, and the basis of the received property. There are also types of gifts which will be include in a persons estate such as certain gifts made within the three year window before death and gifts in which the donor retains an interest like gifts of remainder interests that are not either qualified remainder trusts or charitable remainder trusts. The remainder interest gift tax rules apply the gift tax on the entire value of the trust by assigning a zero value to the interest retained by the donor.

Non-taxable gifts

Generally, the following gifts are not taxable gifts:[1]

Gifts that are not more than the annual exclusion for the calendar year,
Tuition or medical expenses one pays directly to a medical or educational institution for someone,
Gifts to one's spouse,
Gifts to a political organization for its use, and
Gifts to charities.

Gift tax exemptions

There are two levels of exemption from the gift tax. First, transfers of up to (as of 2006) $12,000 per person per year are not subject to the tax. An individual can make gifts up to this amount to as many people as they wish each year. A married couple can pool their individual gift exemptions to make gifts worth up to $24,000 per person per year without incurring any gift tax. Second, there is a credit that essentially negates the tax on gifts until a total of $1,000,000 has been given by one person to another.

If an individual or couple makes gifts of more than the limit, gift tax is incurred. The individual or couple has the option of paying the gift taxes that year, or to use some of the "unified credit" that would otherwise reduce the estate tax. In some situations it may be advisable to pay the tax in advance to reduce the size of the estate.

In many instances, however, an estate planning strategy is to give the maximum amount possible to as many people as possible to reduce the size of the estate.

Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of $1 million may be subject to a generation-skipping transfer tax if certain other criteria are met.

Further information: Estate tax in the United States

U.S. Federal gift tax contrasted with U.S. Federal income tax treatment of gifts

The treatment of a gift for purposes of the U.S. gift tax (the transfer tax) should not be confused with the treatment of gifts for other tax purposes. For example, for U.S. income tax purposes, most gifts are excluded (under Internal Revenue Code section 102^[2]) from the gross income of the recipient, and thus are not taxed as income.

Gifts from certain parties will always be taxed for U.S. Federal income tax purposes. Under Internal Revenue Code section 102(c)^[3], gifts transferred by or for an employer to, or for the benefit of, an employee cannot be excluded from the gross income of the employee for Federal income tax purposes. While there are some statutory exemptions under this rule for de minimis fringe amounts, and for achievement awards, the general rule is the employee must report a “gift” from the employer as income for Federal income tax purposes.