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FAQ: Tax Law

What are Gift Taxes?

The federal gift tax applies to any transfer of property by gift. If a person gives property, which includes money or the use of or income from property, without the expectation that he or she will get something of equal or greater value in return, it is a gift. In addition, if an individual sells property for less than its value or makes an interest-free or lower-interest loan, it may be considered a gift. The recipient of the gift does not have to pay a gift tax or income tax on the value of the gift.

As a general rule, all gifts are taxable. Of course, there are exceptions to this rule. The following gifts are not taxable gifts:

  • Tuition or medical costs paid directly to an education or medical institution on behalf of someone else
  • Gifts to a spouse
  • Gifts to a political organization
  • Gifts to charities
  • Gifts that are not greater than the annual exclusion for the calendar year (except for gifts of future interests)

The annual exclusion may be periodically increased due to cost-of-living adjustments. As of 2010, the annual exclusion was $13,000. Thus, if an individual gave $13,000 to each of his three grandchildren in 2010, he will have made "gifts" totaling $39,000 that will not be subject to the gift tax. Married couples may pool their individual annual exclusions. Thus, in 2010, a married couple was permitted to give an individual up to $26,000 without being taxed.

It is not necessary to file a gift tax return to report gifts of tuition or medical expenses or gifts to political organizations. For example, suppose John Smith paid a friend’s law school tuition of $50,000. Even though the tuition is higher than the exclusion amount, John would not be taxed as long as the tuition was paid directly to the educational institution. In addition, deductible gifts to charities in the form of the entire interest in property or a qualified conservation contribution that is a restriction on the use of real property do not have to be reported. A person must file a gift tax return (using IRS Form 709) if any of the following apply:

  • The individual gifts items to at least one person (other than a spouse) that exceed the annual exclusion
  • The individual gives a gift of a future interest to someone (other than a spouse) and the gift cannot be possessed, received or enjoyed until sometime in the future
  • A person gives his or her spouse an interest in property that will end with some future event involving his or her spouse
  • A person split a gift with his or her spouse

Gift splitting is when a married couple makes a gift to a third party and it is considered as made one-half by the husband and one-half by the wife. Both spouses must agree to split the gift and each can take the annual exclusion for part of the gift.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provided for gift tax relief from January 1, 2002 through December 31, 2010. Under the Act, the maximum gift tax rate was gradually reduced from 55 percent to 35 percent for life-time gifts aggregating more than $1 million ($2 million for married couples). After December 31, 2010, the maximum gift tax rate was scheduled to revert to its 2001 level of 55 percent. However, on December 17, 2010, President Obama signed the 2010 Tax Relief Act, keeping the gift tax rate at 35 percent for another two years, from January 1, 2011 through December 31, 2012, and substantially increasing the exemption from $1 million to $5 million ($10 million for married couples). If Congress fails to enact legislation further extending gift tax relief, the maximum gift tax rate and exemption will revert to their 2001 levels — 55 percent and $1 million, respectively — on January 1, 2013.

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