A gift tax is the federal tax on gifts paid by the person making the gift, or donor. The tax applies whether the donor intends the transfer to be a gift to that person or not. The single donor may give up to $11,000 a year, and married couples can give $22,000 a year, in cash or assets to an unlimited number of people each year without incurring any gift tax liability. The federal tax gift exists to prevent people from avoiding the federal estate tax by giving away all their money before they die.
When Does a Gift Become Taxable?
Gifts in the amounts of more than $11,000 to one person in one year are considered a taxable gift and can generate a potential gift tax. A gift tax, however, is not due until you have given away over $1.5 million in your lifetime. The $1.5 million exemption means that most people will never have to worry about paying any gift tax, only millionaires.
What Qualifies as a Gift?
Gifts that are eligible for the annual $11,000 exclusion currently apply only to gifts of property and income the receiver can use presently.
How Can I Avoid Paying the Gift Tax?
You can avoid paying the gift tax by:
- Donating a gift to a charity
- Limiting any interest gifts to $14,000 or less in 2015
- Giving a gift or leaving your money to a spouse
- By paying someone’s medical and/or school expenses
- Arranging for the person receiving the gift, known as the donee, to pay the gift tax
What About Spousal Deductions?
Gifts of any amount between spouses are 100% deductible for gift tax purposes. This is known as the "unlimited gift tax marital deduction." This gift exclusion only applies to spouses who are U.S. citizens.
Do Medical and School Expenses Qualify as Deductions?
Medical bills or tuition expenses are excluded 100% for gift tax purposes. These exclusions are allowed independent of your relationship to the recipient. Payments cannot be made directly to the recipient, but to the medical care facility or the educational institution.
Do I Need a Gift Tax Lawyer?
Tax law by itself can be very complex and frustrating. Gift tax laws can be even more confusing. A tax lawyer can help you understand how gift tax laws affect you. If you ever face an audit because of unpaid taxes, a lawyer can help you get through the process.