Gift tax

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The Gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not.[1]

The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.[1]

What can be excluded from gifts?

The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.[2]

  1. Gifts that are not more than the annual exclusion for the calendar year.
  2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
  3. Gifts to your spouse.
  4. Gifts to a political organization for its use.

In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.[2]

Annual exclusion

As noted in the previous section, gifts under the annual exclusion amount are not a taxable gift. For 2020, the exclusion amount is $15,000.[3]

Married couples are each entitled to give away the annual exclusion amount on the gift. In 2020, the total for you and your spouse is $30,000.[3]

The lifetime gift tax exemption is the total amount you can give away tax-free over the course of your entire lifetime. It's a collective cap rather than by person or by year, and it's in addition to the annual exclusion.[4]

Tax return filing

The donor is responsible for paying the gift tax. However, if the donor does not pay the tax, the person receiving the gift may have to pay the tax.[5] Tax returns are only needed if the gift exceeds the exclusion amount.

Use Form 709 to report the following:[5]

  • Transfers subject to the federal gift and certain generation-skipping transfer (GST) taxes and to figure the tax due, if any, on those transfers.
  • Allocation of the lifetime GST exemption to property transferred during the transferor's lifetime.

All gift and GST taxes must be figured and filed on a calendar year basis.[5]

  • List all reportable gifts made during the calendar year on one Form 709. This means you must file a separate return for each calendar year a reportable gift is given (for example, a gift given in 2018 must be reported on a 2018 Form 709).
  • Do not file more than one Form 709 for any one calendar year.

Additional filing information:[5]

  • Spouses may not file a joint gift tax return. Each individual is responsible for his or her own Form 709.
  • You must file a gift tax return to split gifts with your spouse (regardless of their amount).
  • Likewise, each spouse must file a gift tax return if they have made a gift of property held by them as joint tenants or tenants by the entirety.
  • Only individuals are required to file gift tax returns. If a trust, estate, partnership, or corporation makes a gift, the individual beneficiaries, partners, or stockholders are considered donors and may be liable for the gift and GST taxes.

If you are a citizen or resident of the United States, you must file a gift tax return if it meets the situations described in the Form 709 Instructions. See the instructions for additional filing information and rate schedules.[6]

Nonresidents not citizens of the United States are subject to gift and GST taxes for gifts of tangible property situated in the United States.[5][note 1]

Transfers not subject to the gift tax

Four types of transfers are not subject to the gift tax. These are:[5]

  • Transfers to political organizations,
  • Transfers to certain exempt organizations,
  • Payments that qualify for the educational exclusion,
  • Payments that qualify for the medical exclusion.

These transfers are not “gifts” as that term is used on Form 709 and its instructions.[5]

Notes

  1. A person is considered a nonresident not a citizen of the United States if he or she, at the time the gift is made, (1) was not a citizen of the United States and did not reside there, or (2) was domiciled in a U.S. possession and acquired citizenship solely by reason of birth or residence in the possession.

References

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