Giving a gift to a friend, family member, or colleague is generally considered to be a good thing. However, the Internal Revenue Service may view it as a taxable financial transaction. If you are not careful, your gift may end costing you hundreds or even thousands of dollars in taxes. To get the most out of your gift-giving experience, you need to know how the IRS treats the exchange of property and money for nothing or discounted compensation.
What Is Considered to be a Gift?
The IRS considers any property transfer that involves one person transferring ownership of that property to a second person without compensation or at a discounted rate as a gift transfer. This is true even when the transferring party did not intend the transfer to be a gift. For example, selling a family member a car below its market value is considered a gift-giving exchange. Understanding this definition of gifting can help both parties avoid tax issues at the end of the year.
What Is the Gift Tax?
The gift tax was enacted to prevent people from avoiding the estate tax by giving away all of their property before death. What this tax does is set limits on how much you can give away each calendar year to a single person. For example, the 2012 limit was $13,000 per taxpayer for the gift recipient. This means that a single person can gift someone $13,000 a year, and a married couple can gift $26,000 a year to a single gift recipient. There is also a lifetime gift cap that cannot be exceeded. This lifetime cap was set at $5 million in 2011, but it is likely to increase in the future. If these gifting caps are exceeded, then the gift giver incurs a gift tax.
How Much Is the Gift Tax?
The gift tax is a high valued tax. In 2011 it was 35%. This means that if a gift was $26,000, $13,000 would be taxed at 35% for an added tax liability of $4,550.
Are There Exceptions to the Gift Tax?
There are several exceptions to the gift tax. For example, the annual and lifetime gift caps do not apply to gifts given to spouses or charitable organizations. Gifting money to cover someone else’s medical bills is also excluded from the annual and lifetime caps; however, in this case, you have to make the payment directly to the health care provider.
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