Commonly Asked Questions and Answers about the Federal Gift Tax

If you thought the IRS rules and regulations in general were complex and hard to follow, there is one particular IRS subject that a good majority of people just do not easily understand. It concerns the laws dealing with Estates and Gift Taxes. We’ll take a look at some of the most common questions people have concerning this type of taxes.

Why Is There a Gift Tax?

The gift tax was established essentially to prevent individuals from giving away all of their money before they died to avoid the federal estate tax. It is confusing because the recipient doesn’t pay the tax, the giver does and there are exceptions, exclusions, and other rules that complicate the matter.

What Constitutes As a Gift?

A gift is considered to have such a label when any transfer to an individual, directly or indirectly, where full consideration of money’s worth is not given in return.

Who Has to Pay the Gift Tax?

Typically, the person giving the gift is responsible for paying the gift tax but there are exceptions where the recipient can make arrangements to pay the tax. If you give people a lot of money or property, you will be responsible for paying a federal gift tax.

Is the Gift Tax Deductible?

When you make give a gift or leave an estate to heirs, it typically does not affect your income taxes. There is no deduction for the value of the gifts you make unless it is a legitimate charitable contribution.

What Is Not Considered a Gift?

Any gift is considered a taxable gift but there are exceptions. For instance, gifts for tuition or medical expenses are excluded. Also excluded are gifts that are not more than the yearly exclusion for the calendar year, gifts made to your spouse, or figs to a political organization for its use.

What Is the Annual Exclusion Amount?

In 2010, the annual exclusion amount on a gift is $13,000 which can be given to any number of people annually without being taxed. In a lifetime, you can give away up to $1 million in gifts before having to face a gift tax.

How Do You Include Gift Information with Taxes?

Along with a copy of your income tax return, you will need to complete Form 709 and attached copies of appraisals, relevant documents regarding the gift transfer, and any documentation of unusual items shown on the return such as partially-gifted assets.

Can You File The Gift Tax Information on Your Own?

Because the gift tax is complex, you may need assistance to prepare your tax information. Consider how complex or large the gift transfer is. You might need to hire an attorney or tax professional to help file the paperwork. You also may need to consult with IRS or state taxation professionals about any questions you might have regarding a particular gift amount or transaction. You may wish to consult with the estate attorney if the gift was let to you in a will.

Since there are many exceptions and different rules concerning gifts, it is advisable to consult with a professional who has firm grasp of the rules before you decide to gift money to people. As you are ultimately responsible for the taxes to be paid out, it is essential the process is completed correctly and your tax information is filed properly to prevent an audit.