The federal government and some states tax an individual’s transfer of wealth to another person during lifetime. The gift giver, the donor, is primarily liable for the payment of the federal gift tax. If the donor does not pay the tax, the recipient of the gift is personally liable for paying the tax to the extent of the value of the gift.
What Gifts are Taxable?
All gifts are considered taxable unless exempted from tax for one of the following reasons:
- A gift worth $10,000 or less so long as it is considered a gift of a present interest in property. An individual may make an unlimited number of nontaxable gifts provided that no one recipient receives more than $10,000 in any calendar year. Certain gifts in trust, and gifts of property like life insurance, are not considered gifts of a present interest. The $10,000 amount will increase in future years to keep pace with inflation.
- The direct payment of an individual’s tuition or medical expenses
- gifts to charitable organizations
- gifts between spouses
Each person is also entitled to a lifetime credit against the gift tax. This credit is known as the “unified credit” which is a direct dollar-for-dollar reduction of the tax due. In 1998, the credit is equivalent to the tax on the first $625,000 of taxable gifts. The Taxpayer Relief Act of 1997 increased the amount of the unified credit to:
- $650,000 for gifts made in 1999
- $675,000 in 2000 and 2001
- $700,000 in 2002 and 2003
- $850,000 in 2004
- $950,000 in 2005
- $1,000,000 thereafter
The credit cannot exceed the amount of the tax less other credits.
Married individuals may “split” their gifts if both spouses consent. A split gift is treated as if each spouse made a gift equal to one-half of the value of the total gift. If a gift is split, then each spouse is entitled to utilize both the $10,000 annual exclusions and their own unified credit.
Gift Tax Returns
The donor of a taxable gift is required to file a federal Gift Tax Return on Form 709 or 709-A. The donor’s spouse is also required to file a return if they elect to split gifts. The gift tax return is due by April 15th of the year after the gift is made. Extending the date for filing an individual’s federal income tax return can also extend the due date for the gift tax return.
The amount of gift tax is based upon the value of the property transferred. The gift tax is computed and payable on an annual basis. It is imposed on a cumulative basis. The current year’s tax is equal to the difference between
- the tax on all gifts to date
- the tax on all gifts other than the current year’s gifts
The gift tax rates are graduated. The lowest rate is 37%. The highest rate is 55%. Additionally, the unified credit amount and the lower rate brackets are recaptured by the imposition of a 60% rate for very large gifts and estates.