Gift Tax

Definition

The gift tax is a tax imposed by the federal government and most state governments on the transfer of assets from one person (the donor) to another person (the donee) where no (or minimal) compensation is made in return. It is a graduated excise tax which means that it increases with the value of the property transferred. As of 2011, each individual could give up to $13,000 per year to each donee without incurring federal gift tax. For larger gifts within the same year, potential federal gift tax might apply, or alternatively, such gifts might impact the donor’s estate tax by diminishing their lifetime gift and estate tax exclusion.

Examples

Annual Gift Exclusion Example:
- In 2023, a donor can give up to $17,000 per donee per year without incurring a gift tax liability.
Gifts Above the Exclusion Limit:
- If a donor gives $25,000 to a single recipient in a year, the amount over the exclusion limit ($25,000 - $17,000 = $8,000) may be subject to gift tax or may reduce the donor’s lifetime gift and estate tax exemption.
Lifetime Gift and Estate Tax Exemption:
- If a donor has a lifetime exemption of $12.92 million in 2023 and gives $1 million to a donee in one year, that gift will reduce the individual’s remaining lifetime exemption amount to $11.92 million if they opt not to pay a gift tax.

Frequently Asked Questions (FAQs)

What is the federal gift tax annual exclusion for 2023?

The annual exclusion for gifts made to any one person is $17,000 in 2023.

Are there any exceptions to the gift tax?

Yes, gifts to a spouse, direct payment of medical expenses, and tuition for someone else are generally exempt from the gift tax.

How do I report a gift that exceeds the annual exclusion?

You must file IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return.

Does receiving a gift affect the recipient’s taxes?

No, the recipient of the gift generally does not incur income tax liability on the gift received.

What happens if the donor pays the gift tax?

If the donor chooses to pay the gift tax, it could reduce their lifetime gift and estate tax exemption.

Donor: The individual who gives the gift.
Donee: The individual or entity that receives the gift.
Estate Tax: A tax levied on the net value of the estate of a deceased person before distribution to the heirs.
Lifetime Gift and Estate Tax Exclusion: A cumulative limit on the total amount of gifts and estates that are dollars are exempted from estate and gift taxes during a person’s lifetime.

Online References

Suggested Books for Further Study

“The Complete Guide to Planning Your Estate in Texas” by Linda C. Ashar (2009)
“Federal Tax Research” by Roby Sawyers and Steven Gill (2018)

Fundamentals of Gift Tax: Taxation Basics Quiz

### Does the recipient of a gift have to pay income tax on the gift received? - [ ] Yes, always. - [ ] Yes, if above the annual exclusion. - [ ] Yes, if the gift is a large amount. - [x] No, generally the donor pays the gift tax. > **Explanation:** The recipient of the gift does not pay income tax on the gift received. Generally, it is the donor who is responsible for paying the gift tax. ### What is the federal gift tax annual exclusion for 2023? - [ ] $10,000 - [x] $17,000 - [ ] $25,000 - [ ] $15,000 > **Explanation:** For the year 2023, the federal gift tax annual exclusion is $17,000 per recipient. ### Who must file IRS Form 709? - [ ] The donee. - [ x] The donor. - [ ] Any individual giving gifts under $15,000. - [ ] The IRS. > **Explanation:** The donor must file IRS Form 709 if they gift more than the annual exclusion limit to a single recipient. ### Which gifts are generally exempt from federal gift tax? - [ ] All gifts below $1,000. - [ ] All gifts to siblings. - [ ] Any single gift in a person's lifetime. - [x] Gifts to a spouse or direct payments of medical/tuition expenses. > **Explanation:** Gifts to a spouse, direct payments of medical expenses, and tuition for someone else are generally exempt from the federal gift tax. ### What effect does paying gift tax have on a donor’s estate tax? - [ ] None. - [ ] Increases the donor's estate tax. - [ ] Delays the payment of estate tax. - [x] Reduces the donor's lifetime gift and estate tax exclusion. > **Explanation:** If a donor pays gift tax, it can reduce their lifetime gift and estate tax exclusion. ### If a donor gives $30,000 to one donee in 2023, what is the taxable amount? - [ ] $13,000 - [ ] $17,000 - [x] $13,000 - [ ] $0 > **Explanation:** The taxable amount is $13,000 (i.e., $30,000 – the $17,000 annual exclusion). ### Why is the gift tax important? - [ ] To tax recipients. - [ ] To limit gifts. - [ x] To ensure taxes cannot be avoided by claiming large gifts. - [ ] To prevent any gifts made. > **Explanation:** The gift tax is important because it ensures that individuals cannot avoid estate taxes by giving away large portions of their wealth as gifts. ### What is a lifetime gift and estate tax exclusion? - [ ] Total goods an individual can receive in gifts each year. - [ ] How much an estate is worth for valuation. - [x] The cumulative amount a person can give without paying gift or estate taxes. - [ ] The tax rate applied to lifetime gifts. > **Explanation:** The lifetime gift and estate tax exclusion is the total amount a person can transfer as gifts or at death without incurring taxes on them. ### Does reviewing a property's depreciation schedule affect gift tax? - [x] No. - [ ] Yes, it changes the taxable value. - [ ] Yes, indirect effect only. - [ ] It varies. > **Explanation:** Depreciation schedules generally do not affect gift tax, which is solely focused on the value of the gift given. ### What needs to be reported on IRS Form 709? - [x] Gifts exceeding the annual exclusion. - [ ] Any gift made. - [ ] Gifts over $1,000. - [ ] Gifts to a spouse. > **Explanation:** Gifts that exceed the annual exclusion need to be reported on IRS Form 709.

Thank you for exploring the detailed aspects of gift tax and enhancing your core understanding through quizzes tailored to hone your skills!