A gift tax is a federal tax which is applied when someone give another person a gift (such as money, property, tangible or intangible assets, etc.). It was created to prevent taxpayers from evading taxes by giving their money and property to others. Because of gift tax, the recipient cannot have the full value of the gift.

Usually, it is the giver who is required to pay the gift tax, but under special circumstances, the receiving party may pay the federal gift tax as well.

How does gift tax work?

  • Regulation
  • Donors should file a gift tax return using IRS Form 709 if their gift exceeds $15,000 that year. (Annual gift exclusion is related to inflation, so it changes every few years.)
  • Donors don’t need to pay the gift tax at once unless they have also exceeded the lifetime exclusion ($11,580,000). Before they reach the threshold, IRS will decrease their remaining lifetime exclusion by their exceeded amount. For example, a donor gave someone a $25,000 gift in 2020, his or her lifetime exclusion will be decreased by $10,000.

*Donors can pay the gift tax right away if they don’t want to lower their lifetime exclusion. The gift tax rates range from 18% to 40% and only apply to the exceeded value.

  • Spouses can enjoy “gift splitting” if they file a joint tax return. Gift splitting means that spouses can give at most $15,000 to the same receiving party, thus a couple can enjoy the gifts of $30,000 without paying the gift tax. It allows the wealthy couples to give their children or others annual gifts, such as tuition, without gift tax 
  • Exemptions
  • Givers are excluded if they give the gift to their spouses who are U.S. citizens. For those whose spouses are noncitizen, gifts under $157,000 are not subject to the gift tax.
  • Gifts to the following organizations are excluded:

a. political organizations

b. social welfare organization or civic league

c. labor, agricultural, or horticultural organization

d. business association

  • Gifts which value is less than the annual gift tax exclusion are excluded.
  • Medical and educational expenses are excluded.
  • Gifts to charity purpose are deducted from the total value of the gifts.

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