Gift Taxes Explained

A gift tax is the taxation of the transfer of property that may come in the form of money, stocks, land, or any other equitable property. The Internal Revenue Code defines the gift tax in Chapter 12, subtitle B, section 2501. As it is defined, the gift is gratuitous if the donor receives nothing in return from the person receiving the gift. The parties involved in the gift tax are the donor and donee (party receiving the gift). The only person that is taxed is the donor. However, the donee may choose to pay the gift taxes of his or her own volition. This is facilitated through an accountant or qualified tax preparer.

Gifts that do not fall under the gift tax include:

Gifts given to a spouse;

Gifts given to a political organization that are to be used by that political organization;

Gifts given that are less than the annual gift exclusion designated for that year;

or, Gifts given to cover medical expenses or the tuition at school or university.

There are annual exclusions established by the Internal Revenue Service (IRS) which allow gifts, depending on their value, to be exempt from the gift tax. In recent years, the exclusion amounts from gift taxes were:

$11,000 from 2002 to 2005;

$12,000 from 2006 to 2008;

and, $13,000 as of 2009.

A married couple may pool together to give a gift and in doing so the exclusion amount of gift taxes is then doubled. A couple or individual may give as many gifts as they want during a year and not be penalized by gift taxes so long as the donor(s) do not exceed the established limit.

Under the federal income tax, gifts are typically excluded as they are then taxed by the federal gift tax. This is because the gift does not affect the gross income of the donee. However, there are instances when the donee would have to pay higher income taxes in addition to gift taxes. If income is received due to the transfer of a gift, that income is not excluded from the federal income tax. This includes gifts of property, money, or any other form of income that increases the gross income of the donee. Also, if an employer gives a gift to an employee, or employees, the employee is required to note that gift on their income taxes as income. Again, this is because the gift increases the gross income of the employee.

When filing tax returns, the donor and the donee must both consider the value of the gift and whether that value must be listed on the tax return. If it is to be listed on the return, information that should be provided are copies of any appraisals of the gift, transfer documentation, and any other documents related to the gift. Also to be considered on the tax return is the fair market value of the gift, which is the price of the gift when purchased by the donor from a vendor.