What is the gift tax and when does it apply?
Who benefits from the gift tax?
What is the gift tax?
The IRS classifies it as any transfer to an individual where “full consideration is not received in return.” What that really means is writing a large check, giving investments, or gifting a car to someone who isn’t your spouse or dependent. Read more about it here.
The gift tax limit applies to how much you can give in a year and how much you can give in a lifetime. If you exceed the limits, you’ll have to pay tax on the extra gifts. The limit is adjusted annually.
Gift tax is the responsibility of the gift giver. However, there are specific circumstances that require the recipient to pay if they had an agreement with the donor.
What gifts are exempt from tax?
Cash, checks, property, and interest-free loans are all considered taxable gifts. Selling something for less than its actual value is a gift, and you’d pay tax on the remaining value.
If the amount exceeds the annual gift tax exemption it is then deducted from your lifetime gift tax exemption.
You can give out as many gifts as you want without having to pay a gift tax if it is:
- anything given to a US citizen’s spouse
- anything you give to someone who relies on you
- donations to charity
- donations to political campaigns
- direct payments to educational institutions on behalf of someone else
- funds paid directly to medical services or health insurance providers on behalf of someone else
However, there are some exceptions. For example, you can only give your spouse $157,000 a year if they are not a US citizen. Anything over that is subject to tax.
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