Gift taxes are taxes on gifted money or property that supplement the estate tax. Gift taxes are placed on gifts given to any person while you are still living, and only apply on gifts of certain value. Starting January, 2009 a person may gift up to $13,000 in cash or assets to an unlimited number of people each year without incurring gift tax liability. The gift tax exclusion is indexed for cost-of-living.
Example: You gave $11,000 one year to your best buddy, Paul. No federal gift tax.
Example: Sam, your 19-year old third cousin, needed to buy a car in order to get to work. You gift him $19,500. You owe $6,500 federal gift tax.
Example: You paid $15,000 medical school tuition of your granddaughter directly to her medical school. This is exempt from federal gift tax.
If you made a gift to a person during the year over the annual exclusion (currently $13,000), you must file IRS forms 709 or 709A.
What if I Gift more than the Allowed Amount?
If you give more than the limit annually, the excess is applied toward your lifetime gift tax exclusion. This means gifts you gave during your life or left in your estate are untaxed until they reach the $5,000,000 threshold. Of course, any gift transferred between spouses of any size is 100% gift tax free. The spouses must be U.S. citizens. Keep in mind that the gift tax exemption is separate from the gift-tax exclusion ($13,000).
Changes in Gift Tax
The Economic Growth and Tax Relief Reconciliation Act of 2001 did not abolish the gift tax. The law retained the $10,000 per year per donee exemption, although the amount is indexed annually at $13,000. Though Congress made changes in the estate tax over the years, the gift tax exclusion went from $625,000 in 2001 to $1 million dollars in 2009. For 2011 and 2012, both estate and gift taxes are in sync with the same rate (35%) and exclusion amounts ($5 million).
Getting Legal Help
Because gift taxes can change depending on the size of the gift and the relevant gift tax law, it is important to consult an experienced tax attorney with any questions about the gift tax