What Gifts Are Subject to the Gift Tax?
You'll Owe a Gift Tax if You Give Large Gifts to Certain People
The federal gift tax applies to all gifts you make during your lifetime. A gift is taxable depending on three factors:
- Its recipient
- Its fair market value
- Whether the gift is of a present or future interest
Recipient of the Gift
All gifts made to a spouse are exempt from federal gift taxes, provided the recipient is a U.S. citizen. The unlimited marital deduction allows spouses to give property to each other without taxation either before or after death.
You can give up to $148,000 a year to your spouse as of 2016 if they are not a U.S. citizen. This exemption increases annually.
What's Fair Market Value?
Fair market value is defined for tax purposes as what one individual might be paid for an item of property if neither he nor the seller were under duress—in other words, it's not a fire sale. Fair market value is typically a gift's appraised value or a value comparable to other similar items sold at the same point in time.
If you give cash, there's really no dispute as to its value. But if you sell someone a $300,000 home for $150,000, you're considered to have given a gift of $150,000 because you did not receive anything in exchange for this portion of the property's value.
Gifts of Present Interest vs. Gifts of Future Interest
A gift of present interest is one that the recipient is immediately free to use for her own enjoyment and benefit—no strings attached.
If the recipient does not have complete use and enjoyment of the gift until some future point in time, it's a future interest gift.
A common example of a future interest gift is reserving a life estate for yourself in real estate. Your beneficiary—perhaps your spouse or your child—does not become the full and vested owner until your death.
Future interest gifts don't qualify for the unlimited marital deduction or other gift tax exclusions and exemptions. If you've made a future interest gift to anyone, the entire gift is taxable and must be reported to the IRS on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
Exemptions, Exclusions, and Exceptions
Federal law exempts the first $14,000 you give per person per year as of 2016. This annual exclusion from gift tax increases periodically in $1,000 increments to keep pace with inflation.
You can apply this exemption to gifts made to anyone other than your spouse. If you make a one-time gift of $114,000 to your son for the purchase of a home, $14,000 of the gift is free and clear of the federal gift tax. The remaining $100,000 is a taxable gift. If you gift your son $10,000 in January and an additional $100,000 in June of the same year, the first $14,000 is free and clear of the federal gift tax and $96,000 is a taxable gift.
Certain types of gifts are exempted from taxation. You can make unlimited gifts to qualified charities. You can pay someone's medical bills on his behalf with no limit, and educational gifts in the way of tuition and qualified fees are exempt.
You must pay the medical care provider or the educational institution directly, however.
Federal tax law also offers a lifetime exclusion from the gift tax, but it's shared with the estate tax. This lifetime exclusion also called the Unified Tax Credit, is $5.45 million as of 2016. It's indexed for inflation so it, too, increases periodically. If you exceed the $14,000 annual exclusion to one recipient during a given tax year, you can either pay the gift tax on the balance or apply this lifetime credit. Each time you apply the lifetime credit, however, the amount of the gift is subtracted, leaving less of the exclusion to shelter your estate from taxation at the time of your death.
NOTE: Tax laws change periodically, and you should consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and is not a substitute for tax advice.