The Gift Tax, the Exclusion and the Lifetime Exemption
IRS Definition of Gift -- "Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return."
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The gift tax is the responsibility of the person giving the gift (not the person receiving the gift) and the amount due is based on the value of their gift. However, if the giver does not pay the gift tax, the receiver may have to pay. The only person exempt from the gift tax is your spouse. Gifts to your spouse qualify for the marital deduction.
There is, however, an annual exclusion of $14,000 per recipient where there is no tax gift owed by either party whether the gift is to your own children, another relative or someone else. Married couples can give $28,000 to each person without incurring the gift tax.
Payments that you make on someone's behalf for qualified tuition or medical expenses do not count towards the annual limit for gift tax purposes. Note, however, that your payment(s) must be made directly to a qualifying educational organization or medical care provider in order to qualify for the exclusion. You can also place funds directly into a 529 education savings plan to avoid the gift tax — but note that certain rules apply – ask us about your situation.
In general, you must file a Federal gift tax return (IRS Form 709) if you gave someone more than $14,000 during the year. In some cases, you are required to file Form 709 even if your gift was below the $14,000 annual exclusion. However, that doesn’t necessarily mean you’ll have to pay the gift tax. Instead, you can apply the gift towards your lifetime exclusion from the Federal estate tax.
Lifetime Exemption is the amount a person can give away in their lifetime; this represents both the lifetime gift tax exemption and the estate tax exclusion. The 2017 exemption is $5.49 million dollars. Keep in mind, however, any portion that’s used to avoid the gift tax reduces the amount that will be exempt from estate tax. For example, if you used $2 million of the exemption to make taxable gifts during your lifetime, you will only be able to exclude $3.49 million from the estate tax. If you surpass the $5.49 million limit, you (or your heirs) will have to pay up to 40% tax.
Also, Promotional Gifts (if you’re lucky enough to win a car or such) do not count as a “gift” by the IRS standards.