Gift tax laws are fairly straightforward. Furthermore, most gifts do not result in gift tax or income tax. However, being careless when gifting large sums of money can result in unintended consequences, so it pays to understand the implications of the gift tax.
Who Pays The Gift Tax?
One of the few kinds of income not taxed in America is a gift. Gift tax only applies to the person giving the gift, not the person who receives it. This is the opposite of wages, where the employee must pay income tax on the amount paid, but the employer does not.
Gift Tax and the Annual Exclusion
Each year, you are permitted to give up to the amount of the annual exclusion to any individual recipient without triggering the gift tax. In 2009, the figure is $13,000. Importantly, this is per gift recipient, not per gift-giver. Therefore, if Grandma wants to make the maximum gift to each of her ten grandchildren, she can actually give up to $130,000 each year, so long as no one grandchild receives more than $13,000 from Grandma.
Gift Tax and Gift Splitting
If Grandpa is feeling cooperative, Grandma and Grandpa can elect to split the gifts. By doing so, they can together give up to $26,000 per year (a 2009 figure) to each of their ten grandchildren. Furthermore, if any of the grandchildren are married, another $26,000 could be given to their spouse. Note: any gift to an individual in excess of $13,000 will require that a simple gift tax form be completed by the gift giver, but no tax will be due.
Gift Tax - Other Exclusions
Two other important exclusions besides the annual exclusion are the exclusion for medical expenses and the educational expense exclusion. A gift giver may give an unlimited amount of money for another person’s medical care or educational expenses, but only if the payment is made directly to the institution providing the care or education.
Gift Tax - Lifetime Exemption
Should the total amount of gifts in any one year exceed the annual exclusion, tax would be calculated. However, the first one million dollars of taxable gift is currently (2009) not taxed. Instead, such gifts reduce the amount the gift giver would be permitted to pass along to non-spouse heirs tax-free upon his or her death. As such, it’s important for those with very high asset levels to take full advantage of their annual gift exclusions if they’d like to lower the overall amount of gift and estate taxes they pay.