Gift Tax - Explained
What is a Gift Tax?
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Table of ContentsWhat is a Gift Tax?How Does a Gift Tax Work?Valid Gift Requirements Gift Valuation Some of the Gifts that are Exempted from Gift TaxAcademic Research on Gift Tax
What is a Gift Tax?
A gift tax is a type of federal tax where an individual transfers anything valuable to another person when the person is still alive, for the purpose of reducing tax. To consider something as a gift, what the gift receiver pays the donor should be less than the value of the gift. In other words, it is the gift giver who pays the gift tax.
Back to:ACCOUNTING & TAXATION
How Does a Gift Tax Work?
Generally, the Internal Revenue Service (IRS) will only subject your monetary gifts to taxation if the value exceeds the set value. Note that gift tax applies to the following: Giving your child funds to make down payment for an apartment:
- Giving out donations
- Giving out funds to foot the bills of a homeless person
- Note that every taxpayer benefits from gift tax exemptions.
As a taxpayer, the IRS permits you to make use of a lifetime and annual exclusion. The amount of money or assets you give as a gift has to be significant for the exemption to apply. When it comes to donations, the IRS will want their share. So, you are expected to track all your donations. Most gifts are not subject to taxation because of the tax exemption laws. However, for those gifts that are tax deductible will vary depending on the jurisdiction.
Valid Gift Requirements
There are certain requirements to be met for a gift to be valid. The requirements are listed below:
- There must be an intention by the donor to willingly transfer funds or assets to the donee
- The receiver of the gift should be able and ready to have the gift
- The donor must be competent enough to initiate the transfers
- The donor must give up the control of all the assets in questions to the receiver
To be able to determine whether a gift is subject to taxation, the valuation of that gift is necessary. Through valuation, the gifts market value from the date of its transfer is established. When it comes to real estates, the appraisal of the real estate and collectibles becomes necessary. For instance, something like a bond its value determination is usually at the current market value of its payments in the future. For publicly traded shares, their value estimation is at the average (both low and high share price) from the date the reciever gets the gift. However, with private shares, you need to seek assistance from a competent valuation specialist. The reason is that private shares have restrictions on marketability, liquidity, and control. Nonetheless, the United States Treasury usually has set guidelines for private shares.
Some of the Gifts that are Exempted from Gift Tax
There are certain gifts which are gift tax exemption. Some of these gifts are as follows:
Payment for support: If give funds to meet a legal obligation of your children or dependents, then the funds are exempted from taxation. The legal obligation may be something like paying for higher education tuition fees, board, and room.
Divorce Settlement Payment: Alimony is a taxable income from the receiver's end. However, when it comes to the payer, the contribution is tax deductible. So, any transfer of property, in relation to termination of the marriage and within the year of the divorce is not a gift.
Business Transfers: Any transfer which occurs in a business setting becomes compensation. Also, a gift given to a person as a reward for serving a company, or for retirement commemoration is not taxed.
Charitable Gifts: If the receiver of the charitable gift is any of the institutions mentioned below and the gift is meant for public use, then the gift is free from taxation:
- The federal government
- The state government
- The local government
Also, if a gift is given out for educational corporation, scientific, religious, or charitable purposes, then it is exempted from taxation. Another gift exempted from taxation is that given to the veteran or fraternal organization.
Transfers to Political Organization: Also, exempted from gift tax is fund transfer made to political organizations. Such transfers should be used to lobby for the nomination, selection, or appointment of individuals to the state, federal, or local public offices.
Spousal Gifts: Transfer of gift between wife and husband is not subject to taxation provided the person receiving them is a United States citizen. However, where a person is a non-citizen, then there is tax limitation to such gift transfers.
Academic Research on Gift Tax