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What is the gift tax and who pays it?

The gift tax is a tax on the transfer of property by one individual to another while receiving less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not.

Gift tax applies to the transfer by gift of any 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.

The donor, not the recipient, is generally responsible to pay gift tax on a taxable gift.  Any gift is generally considered a taxable gift, but as with most rules, there are a few exceptions.   Some of the most common exceptions are:Any gift that is less than the annual exclusion ($15,000 in 2018)

  • Tuition or medical expenses paid directly to the provider on someone’s behalf
  • Gifts to a spouse who is a US citizen
  • Gifts to political organizations
  • Charitable gifts

The annual exclusion applies to each donee on an annual basis.  Each calendar year, gifts of not more than the annual exclusion – currently $15,000 to a done are not taxable.  For example, if you have 3 children, you can gift them each up to $15,000 a year and exclude the gifts from taxable gifts under the annual exclusion.

A married couple can each gift up to $15,000 to a donee for a combined total gift of $30,000 to a donee and still exclude the gifts under the annual exclusion.

The donor who makes the gift is responsible to file the gift tax return if needed and to pay any tax.  For example, if the donor makes a gift of $16,000 to an individual, they must file a gift tax return.  The return would show a gift of $1,000 in excess of the annual exclusion.  In addition to the annual exclusion, which is determined on a donee basis, there is also a lifetime gift tax exclusion.  The lifetime gift tax exclusion is determined at the donor level and is $11,180,000 in 2018.  Each year any gifts that a donor gives that exceed the annual exclusion accumulate.  Once the donor’s total gifts exceed the lifetime limit, then the donor will owe gift tax.

Except for gifts to qualified charities, you can not deduct the value of gifts you made for income tax purposes.

If you have any questions or would like assistance in determining if you need to file a gift tax return, please Contact Us.