At first glance the gift tax regulations seem quite complicated. That is because the Internal Revenue Service hires writers who cannot write a simple sentence. If the tax code was written in plain English it would likely be hundreds, if not thousands of pages shorter.
By using a FAQ format, we hope most of your questions will be addressed. The information in this FAQ, however, does not replace the advice of a tax attorney or tax accountant. Before you act, check with you tax adviser to make sure your intended outcome is legal and obtainable.
Q. What does the Internal Revenue Service consider to be a taxable gift?
A. Generally, the Internal Revenue Service is not concerned with gifts such as birthday gifts, anniversary gifts or Christmas and holiday season presents. However, if you give a gift that has a value of more than $13,000 to one person, other than your spouse, or, if you give a number of gifts to an individual other than your spouse that are worth $13,000 or more collectively, in one
year, then gift tax must be paid.
Q. Who pays the gift tax?
A. Usually, the gift giver pays the gift tax. If you give a gift but plan on having the recipient pay the gift tax it is best to discuss the best way to do this with your tax adviser.
Q. Are there any exclusions to items over $13,000 for gifts so they won’t be taxed?
A. Yes, generally the following gifts are not subject to the gift tax:
- Gifts to a political organization for its use
- Gifts to charities
- Gifts to one’s (US taxpayer) spouse
- Tuition or medical expenses one pays directly to a medical or educational institution for someone
Q. Why is there a gift tax?
A. The gift tax is intended by congress to be a safe guard to the federal estate tax. If there were no gift tax, large estates could reduce their tax liability just by giving money and stocks and such away before death. This would have serious negative effects on estate taxes from potentially large estates. However, the original gift tax was passed by congress in 1932 to encourage folks who were wealthy to give family members gifts to members. Congress did this to raise money during the Great Depression. The gift tax was a full 25 percent lower than the estate tax and included a $50,000 exemption. A wealthy person could give their child a $10 million gift and pay $2,300,000 in gift tax. This came to an effective tax rate of only 18.7 percent, far lower than the estate tax. However, only the wealthiest individuals in the United States could make use of this way to avoid estate taxes as they were the only ones with enough cash to be able to use it.
While the gift tax was designed to quickly raise revenue for the federal government it was at the expense of future federal treasury revenues and more directly had a negative effect on state governments.
Ryan C. Young | Estate Attorney | Richmond, Virginia