A gift tax is a federal tax applied to an individual giving anything of value to another person. For something to be considered a gift, the receiving party cannot pay the giver full value for the gift, but may pay an amount less than its full value. It is the giver of the gift who is required to pay the gift tax. The receiver of the gift may pay the gift tax, or a percentage of it, on the giver’s behalf in the event that the giver has exceeded his/her annual personal gift tax deduction limit.

The gift tax is the responsibility of the person who gives a gift (i.e. the donor), and the amount of tax due is based on the value of their gift. The person who receives a gift (i.e. the donee) is generally not responsible for paying the gift tax. However, if the donor does not pay the gift tax, the donee may have to pay the tax instead.

Here are 7 things you should know about the Federal gift tax in USA:

1. Gifts to Family Members Count

The gift tax and exclusion limit (below) apply whether you are making the gift to a complete stranger, a nephew, or your own children. The only person you can give a gift to that is exempt from the gift tax is your spouse. Gifts to your spouse qualify for the marital deduction.  Gifts to citizen spouses qualify for the unlimited marital deduction so you can leave all your assets to your spouse tax free. Gifts to non-citizen spouses do not qualify for the unlimited marital deduction. To compensate for the lack of a marital deduction for non-citizen spouses, the annual exclusion for gifts to non-citizen spouses is higher than the regular $14,000 annual exclusion. In 2017, the annual exclusion for gifts to non-citizen spouses is $149,000. 

2.There Is an Annual Gift Tax Exclusion

You do not have to pay tax on gifts that are less than the annual exclusion limit, which generally changes every year. The annual exemption allows you to make gifts of up to $14,000 per year per person tax-free as of 2017.In other words, you can give up to $14,000 this year without having to pay any gift tax.

3.There Are Also Educational and Medical Exclusions

Payments that you make on someone’s behalf for qualified tuition or medical expenses do not count towards the annual limit for gift tax purposes. However, your payments must be made directly to a qualifying educational organization or medical care provider in order to qualify for the exclusion.

4.You May Need to File a Gift Tax Return (Form 709)

In general, you must file a Federal gift tax return (IRS Form 709) if you gave someone more than $14,000 during the year. In some cases, you are required to file Form 709 even if your gift was below the $14,000 annual exclusion. Note that only individuals are responsible for filing gift tax returns — corporations or trusts that make gifts will pass the filing and payment responsibilities onto their individual stockholders or beneficiaries. Additionally, a married couple cannot file a joint gift tax return.

Form 709 is an annual return that is due by April 15 of the year after the gift was made. While this is the same deadline as the individual income tax return, the gift tax return must be filed separately.

5.Married Couples Can Give Twice As Much

Spouses can each give up to $14,000 to the same recipient and still stay within the annual exclusion threshold. Together, a married couple can give $28,000 to each donee without incurring the gift tax.

6.Each Donor Has a Lifetime Exemption

This refers to the total amount that an individual can give away during their entire lifetime. If your gift exceeds the $14,000 annual threshold, it must be reported as a taxable gift on Form 709 — however, that doesn’t necessarily mean you’ll have to pay the gift tax. Instead, you can apply the gift towards your lifetime exclusion from the Federal estate tax.

The “basic exclusion” (also known as the “unified credit”) represents both the lifetime gift tax exemption and the estate tax exclusion, signified as a total amount of $5.49 million. The current law allows individuals to give away up to $5.49 million over their lifetime without having to pay gift or estate taxes.

But keep in mind; any portion that’s used to avoid the gift tax reduces the amount that will be exempt from estate tax. For example, if you used $2 million of the exemption to make taxable gifts during your lifetime, you will only be able to exclude $5.49 million from the estate tax. If you surpass the $5.49 million limit, you (or your heirs) will have to pay up to 40% tax.

You can give someone $14,000 per year and it won’t affect your lifetime exemption (because gifts below the annual threshold are not considered taxable). If you exceed the $14,000 annual gift tax threshold, you must file Form 709 and report the amount that counts against your lifetime exemption. You should also hold onto any relevant paperwork so your heirs can properly compute the estate tax later.

7.Promotional Gifts Aren’t Considered “Gifts”

If you receive a gift as part of a promotion — for example, a car is given away to every member of the studio audience — then it does not count as a “gift” by IRS standards because the giver is getting something in return, namely self-promotion. This means that the tax burden for a promotional gift falls on the recipient (because it increases their wealth) and is not eligible for the annual gift tax exclusion.

What is the bottom line when it comes to making gifts? If you are not sure if you are about to make a taxable gift, then consult with your accountant or estate planning attorney to be sure so that you are not surprised by the gift tax consequences after the fact.

We will discuss the taxability of other items along with steps to file your return in subsequent articles. Keep following us!

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