What is Gift Tax?
Definition: Gift tax is a tax levied by the federal government on any property or assets given to another person without receiving full value in exchange.
What does Gift Tax Mean?
If an individual gives some money to another person without expecting it to be paid back, it would be considered to be a gift. Similarly, if the amount received by the person who is transferring some property to another individual is less than its value, the difference will be considered to be a gift.
Every gift is not taxable. Say, you gift someone a sum of $15,000. Gift tax will not apply to this because $15,000 is the annual gift tax exclusion limit. Remember that this is not the total limit. It is the limit for the gift that you make to each person receiving a gift from you. So, you could gift $15,000 each to two individuals (a total of $30,000) and still not be required to pay any gift tax.
In addition to the annual limit for making tax-free gifts, there is a lifetime limit as well. In 2019, the lifetime limit is $11.4 million. How will the IRS know how much you have gifted in your lifetime? It is your responsibility to tell them.
The person making the gift has to pay the gift tax. However, under certain circumstances, the person receiving the gift could pay the tax.
Example of Gift Tax
The following is a list of gifts that are excluded from tax:
⇨ Gifts that fall within the annual exclusion limit.
⇨ The sums that are paid for another person’s education expenses. Only tuition fees are exempt, and these must be paid directly to the educational institution.
⇨ Amounts paid to your spouse are exempt.
⇨ Gifts to a political organization or to specific charities are also exempt.
For more information read this article about how gift tax works.
Gift tax is payable to the federal government on all the gifts that you make. However, there are certain annual exemptions as well as a lifetime exemption.