What is a gift tax and who has to pay the gift tax?
In the United States there are literally thousands of tax code variations and tax law variations that can affect each of us differently. A gift tax is one type of tax levied by the federal government on an individual who gives gifts to one person in a calendar year over a certain amount.
This information is provided for purely informational purposes and it is best to consult your accountant or the IRS for the latest tax codes and information.
At what amount does the gift tax kick in?
In one calendar year if a person gives another person a gift of $12,000 or more as of 2008 the amount has to be reported by the person giving the gift.
However, even though it must be reported; tax does not have to be paid on the $12,000 and up gifts to one person. Rather a lifetime limit is imposed on the giver which is $1,000,000 as of 2008. If a person exceeds $12,000 in a single year for one person and over their lifetime gives gifts exceeding $1,000,000 the tax will be assessed. But the dollar amount that contributes to the lifetime limit is only the amount over $12,000 dollars.
For example if you give your friend a gift that is valued at $17,000 and give a family member that isn’t your spouse a gift that is valued at $14,000 only $5,000 from the first gift and $2,000 gift count towards the lifetime limit. Any amount up to $12,000 in one year to one person is excluded.
What about certain exclusions?
Gifts given to spouses who are U.S. citizens and also financial “gifts” that go directly to a college for a child’s education or directly to pay medical bills are exempt. For example if you give your child a $20,000 “gift” that is payment towards their tuition, it does not need to be reported as a gift.
On the flip side, you can not claim these “gifts” as a deduction on your income tax regardless of their dollar amount.
Other things to keep in mind:
You should not report gifts that meet the gift tax requirements on your income tax; rather you need to get a separate gift tax reporting form from the IRS. Remember that the gift giver is responsible for reporting any eligible gifts and pay any associated taxes.
Also it is important to note that any amount over the yearly gift dollar amount stated by the IRS that contributes to the lifetime gift amount limit is actually deducted from the amount (up to $3,500,000 as of 2009) of money that you can pass down to family from your estate before estate taxes kick in. For example, if you have “spent up” $500,000 of your $1,000,000 lifetime limit, that is $500,000 less that you will be able to pass to family from your estate tax free; the estate tax will kick in on that amount.