What is Gift Tax?
Gift tax is a federal tax applied to an individual giving anything of value to someone else without receiving something of equivalent value in return. The tax applies to money or other property, whether the transfer is intended as a gift or not. The primary intent is to prevent avoiding federal estate tax by transferring wealth before death.
The IRS allows individuals to give away a certain amount each year without incurring gift tax ($14,000 per recipient per year in 2016, adjusted for inflation over time). Amounts given beyond this exclusion threshold may be subject to gift tax and may also reduce the giver’s lifetime estate tax exclusion.
Key Components:
- Donor: The individual who provides the gift.
- Donee: The individual who receives the gift.
- Annual Exclusion: The amount one person can gift to another yearly without incurring the gift tax. For 2016, this was set at $14,000.
- Lifetime Exclusion: A lifetime total that can be transferred without incurring federal tax. Any gifts beyond the annual exclusion chip away at an individual’s lifetime estate tax exclusion.
Example:
Let’s consider Mr. and Mrs. Abel, who decide to give $28,000 each to their three sons in 2016 for a total amount of $84,000. Since they are using their joint annual exclusions ($14,000 each), no gift tax will be imposed.
Frequently Asked Questions (FAQs):
Who pays the gift tax, the giver or the receiver?
Gift tax is primarily the responsibility of the donor (giver). However, an arrangement can be made where the donee (receiver) pays the tax.
What happens if the gift exceeds the annual exclusion?
If a gift exceeds the annual exclusion amount, it begins to count against the donor’s lifetime estate and gift tax exclusion amount.
Are there any exceptions to the gift tax?
Yes, exceptions include gifts between spouses, payments for someone’s medical bills or tuition (paid directly to the institution), and donations to political organizations.
How do gifts affect estate tax?
Gifts reduce the taxable portion of the estate. Any gifts exceeding the annual exclusion use up part of the donor’s lifetime estate and gift tax exemption, potentially increasing estate tax later.
What is the IRS Form 709?
IRS Form 709 is used for reporting any gift exceeding the annual exclusion. The donor must complete this form and file it by the tax filing deadline for that year.
Related Terms:
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Estate Tax: A federal tax on the transfer of the estate of a deceased person.
- “Estate Tax is the amount levied on the net value of the estate of a decedent before distribution to heirs.”
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Annual Exclusion: The maximum value that a gift can be each year without being subject to gift tax.
- “Annual Exclusion in 2016 was $14,000 per recipient.”
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Lifetime Exclusion: The limit on tax-free gifts that a person can make over their lifetime.
- “The Lifetime Exclusion adds up to the amount an individual can give away during their lifetime without incurring estate tax.”
Online Resources:
- IRS - Gift Tax: Comprehensive guide on gift tax rules and limits.
- Nolo - Gift Tax: Detailed information about when and how gift tax applies.
- Kiplinger - Gift Tax Explained: Practical advice and updates on gift tax laws.
References:
Suggested Books for Further Studies:
- “Your Complete Guide to a Successful and Secure Retirement” by Larry Swedroe and Kevin Grogan - Comprehensive coverage of various financial aspects, including taxes.
- “Plan Your Estate” by Denis Clifford - Detailed resource on estate planning, gift tax included.
- “The Truth About Estate Planning” by John F. Wasik - Simplified guide on estate planning basics.
