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Gift Tax at a Glance

Gift Tax at a Glance

Gift giving is a cherished human tradition, as it fosters love, care, and affection among people. However, when it comes to gift giving, the government has a say in it too. In the United States, the Internal Revenue Service levies a gift tax on certain types of gifts. This article will provide an overview of gift tax and its implications for gift givers and receivers.

What is Gift Tax?

The gift tax is a tax on the transfer of property by one individual to another for less than the property’s fair market value. This includes cash, stocks, bonds, real estate, and other property. The tax code requires that the gift tax be paid by the gift giver, i.e., the donor, and not the receiver, i.e., the donee.

Who Pays Gift Tax?

In general, any person who gives a gift to another person that exceeds the annual exclusion limit must file a federal gift tax return and pay gift tax on the amount that exceeds the exclusion limit. However, there are some exceptions to this rule.

For instance, gifts made to spouses are generally exempt from gift tax, as long as the spouse is a U.S. citizen. Similarly, gifts made to political organizations, charities, or non-profit organizations are also exempt from gift tax. Moreover, payments made for tuition or medical expenses on behalf of another person are not considered taxable gifts.

Annual Exclusion and Lifetime Exemption

The IRS allows individuals to give a certain amount each year in gifts to another person without triggering a gift tax or the need to file a gift tax return. This is known as the annual exclusion. As of 2021, the annual exclusion limit is $15,000 per recipient. This means that an individual can give up to $15,000 to any person without having to pay gift tax or file a gift tax return. For married couples, the limit is $30,000 per recipient.

In addition to the annual exclusion, the IRS also provides a lifetime gift tax exemption that shelters the donor from gift tax on gifts that exceed the annual exclusion. The lifetime exemption amount is indexed for inflation and is $11.7 million for 2021. This means that an individual can give gifts up to $11.7 million during their lifetime without having to pay gift tax.

If the total amount of gifts given by an individual to another person exceeds the annual exclusion limit ($15,000) in a single tax year, the individual must file a federal gift tax return. However, if the total amount of gifts given in a year is less than the annual exclusion but exceeds the lifetime exemption amount, the donor must file a gift tax return but will not owe any gift tax until they exceed their lifetime exemption amount.

How is Gift Tax Calculated?

The gift tax rate is equal to the estate tax rate, which is a progressive tax that ranges from 18% to 40%. The tax rate depends on the amount of the gift given and the cumulative total of gifts made by an individual during their lifetime.

For example, if you give a gift of $20,000 to one person in a single year, you would need to file a gift tax return, and the gift tax would be $1,800 (18% of $5,000, which is the amount that exceeds the annual exclusion). If the total amount of gifts you have given in your lifetime exceeds your lifetime exemption amount, you will need to pay gift tax on the excess at the applicable rate.

Gift Splitting

Married couples who want to give a gift to a single person that exceeds the annual exclusion limit can use a technique known as “”gift splitting.”” Gift splitting allows a married couple to split their gift and use both of their annual exclusion amounts, effectively doubling the limit to $30,000 per recipient. However, both spouses must consent to the gift splitting on a gift tax return, even if only one spouse actually made the gift.

Gift Tax Exclusion for Education and Medical Expenses

As mentioned earlier, payments made for tuition or medical expenses on another person’s behalf are not considered taxable gifts. However, in order to qualify for the exclusion, the payment must be made directly to the educational or medical institution. The educational amount can only cover tuition and not books, room and board, or other related expenses. Similarly, the medical amount can only cover expenses that qualify as deductible medical expenses.

Conclusion

Gift tax is a complex area of taxation that requires careful planning and execution. Whether you are giving or receiving a gift, it is essential to understand gift tax rules and regulations to avoid any unintended tax consequences. While some gifts are exempt from gift tax, others may require the donor to file a gift tax return and pay gift tax. By staying informed about the latest gift tax regulations, you can make informed decisions about gift giving and ensure compliance with the tax code.


The gift tax is imposed on gifts of an value, between two individuals. The gift tax may be imposed on the federal and local level.

There are some exemptions to the gift tax. For example, parents may give gifts of a certain value to their children tax free. The value of those gifts can not exceed a certain amount during the child’s lifetime. In addition, the value of any one gift can not exceed a certain value, even if it falls below the lifetime limit.

There are other exemptions as well, such as gifts given between spouses, or gifts of money for educational purposes. However, most gifts are taxed and the rate of taxation depending on the value of the gift.

In order to avoid gift taxes, some individuals instead opt to set up a living trust or trust funds. For example, a parent may set up a living trust for their children and those monies may be used to pay for a life insurance policy on the parents. In this way, the children would then receive the money from the life insurance policy, which would be subjected to a different form of taxation, which would likely decrease the tax burden.

Gift taxes which do not include exemptions may be taxed at a high rate, depending on the value of the gift. Gifts given between non  family members for example, are subjected to a high rate of taxation.