Understanding the Gift Tax
If you gave money or property to someone as a gift, you may wonder about the federal gift tax. Many gifts are not subject to the gift tax. Here are seven tax tips about gifts and the gift tax.
- Nontaxable Gifts. The general rule is that any gift is a taxable gift. However, there are exceptions to this rule. As long as they are gifts of present interests in property, the following are not taxable gifts:
- Gifts that do not exceed the annual exclusion for the calendar year,
- Tuition or medical expenses you paid directly to a medical or educational institution for someone,
- Gifts to your spouse (for federal tax purposes, the term “spouse” includes individuals of the same sex who are lawfully married),
- Gifts to a political organization for its use, and
- Gifts to charities.
Caveat: If your spouse is not a U.S. citizen, the amount of present interests you can transfer without making a taxable gift is limited.
- Annual Exclusion. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you give a gift to someone else, the gift tax usually does not apply until the value of the gift exceeds the annual exclusion for the year. For 2017, the annual exclusion is $14,000 (same as 2016).
- No Tax on Recipient. Generally, the person who receives your gift will not have to pay a federal gift tax. That person also does not pay income tax on the value of the gift received.
- Gifts Not Deductible. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than deductible charitable contributions).
- Forgiven and Certain Loans. The gift tax may also apply when you forgive a debt or make a loan that is interest-free or below the market interest rate.
- Gift-Splitting. In 2017, you or your spouse can give a gift of up to $28,000 to a third party without making it a taxable gift, if you agree to “gift split” and treat the gift as $14,000 having been gifted by each of you.
- Filing Requirement. You must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return if any of the following apply:
- You gave gifts to at least one person (other than your spouse) that amount to more than the annual exclusion for the year.
- You and your spouse are splitting a gift. This is true even if half of the split gift is less than the annual exclusion. If one spouse did not make any gifts and is only agreeing to gift splitting, only the donor spouse must file a return.
- You gave someone (other than your spouse) a gift of a future interest that they can’t actually possess or enjoy or from which they’ll receive income later.
- You gave your spouse an interest in property that will terminate due to a future event.
Even if a gift tax return is not required, it is sometimes a good idea to file one to begin the running of the statute of limitations. Examples include gifts of property for which a fair market value is not readily available and gifts to trusts subject to withdrawal powers. Also, a gift tax return may be needed to elect out of default allocation rules for generation-skipping transfer tax.
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