Gift Tax Law

When a property is transferred to another individual without the transferor receiving a full consideration in return, it is called a gift. The tax imposed by the government on such transfer of property ownership is called a gift tax. Generally, the tax is to be paid by the person giving the gift. In the U.S., the gift tax law comes under Chapter 12, Subtitle B, of the Internal Revenue Code. Gifts given during the lifetime of the donor do not attract estate tax.

Types of gift transfer

Transfer of property by way of gift can be of two types:

Completely gratuitous - This is when the gift donor is not given anything of value in return for the gift.

Gratuitous in part- This is when the gift donor receives something of value in return, but the value is much lower than that of the property given. According to the gift tax law, the difference between the two values is considered as the gift.

Nontaxable gifts under gift tax law

There are certain gifts on which the government does not impose gift tax:

  • Exclusion: The government sets a certain amount as annual exclusion for gifts. So if the gift is below that amount, there is no gift tax. As of now, this amount is $13,000 per individual.
  • Amount gifted to political organizations
  • Amount gifted to charities
  • Amount gifted to spouse, only if the spouse is a U.S. citizen
  • Medical or tuition fees that a person pays directly to an institution for another person: According to the provisions of the gift tax law, if a check is given in the name of the person who then pays it to the institution, the donor will have to pay gift tax.

Exclusion under gift tax law

As mentioned earlier, in the U.S., annual exclusion for gifts amounts to $13,000. It should be noted that the annual exclusion applies separately to the giver and the receiver of gifts. This means that gift givers can give up to $13,000 of gifts each, without paying tax, irrespective of the amount of gifts received by the receiver from others.

Even if a gift exceeds the exclusion amount, it may still be tax free if it is below the lifetime estate exclusion amount which is $5,120,000 as of now. So in addition to gift tax law, estate tax law will also apply. Estate tax will have to be paid for gifts above this amount. Also, if the gift exceeds $ 1,000,000, a generation skipping transfer tax may have to be paid.

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