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A gift tax is a tax imposed on the gratuitous transfer of ownership of property.
When a taxable gift is made the tax is usually imposed on the donor (the giver) unless there is a retention of an interest which delays completion of the gift. A transfer is completely gratuitous where the donor receives nothing of value in exchange for the gifted property. A transfer is gratuitous in part where the donor receives some value but the value of the property received by the donor is substantially less than the value of the property given by the donor. In this case, the amount of the gift is the difference.
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 included in a person's estate such as certain gifts made within the three year window before death and gifts in which the donor retains an interest, such as 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.
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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
- Gifts to a political organization for its use
- Gifts to charities
- Gifts to one's spouse
- Tuition or medical expenses one pays directly to a medical or educational institution for someone
Gift tax exemptions
There are two levels of exemption from the gift tax. First, transfers of a present interest up to (as of 2009) $13,000 per person per year are not subject to the tax. An individual can make gifts up to this amount to as many people as he/she wishes each year. A married couple can pool their individual gift exemptions to make gifts worth up to $26,000 per couple per year without incurring any gift tax. A lifetime gifting limit of $1,000,000 (gifts above the annual exclusions) is allowed before a gift tax is incurred.
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.
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. For the purposes of taxable income, courts have defined "gift" as proceeds from a "detached and disinterested generosity." See Commissioner v. Duberstein (quoting Commissioner v. LoBue, 351 U.S. 243 (1956)).
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. The foundation for the preceding rule is the presumption that employers do not give employees items of value out of "detached and disinterested generosity" due to the existing employment relationship.
Under Internal Revenue Code section 102(b)(1), income subsequently derived from any property received as a gift is not excludable from the income taxed to the recipient.[4] In addition, under Internal Revenue Code section 102(b)(2), a donor may not circumvent this requirement by gifting only the income and not the property itself to the recipient. [5] Thus, a gift of income is always income to the recipient. Permitting such an exclusion would allow the donor and the recipient to avoid paying taxes on the income received, a loophole Congress has chosen to eliminate.
See also
References
External links
- IRS article, Estate and Gift Taxes
- IRS publication 950, Introduction to Estate and Gift Taxes
- IRS publication 950,Introduction to Estate and Gift Taxes
- IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return
- Instructions for Form 709, Instructions for Form 709
- Instructions for Form 709, Instructions for Form 709
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