What Gifts Are Subject to the Gift Tax?
Exemptions, exclusions, and exceptions can help you avoid the tax
The federal gift tax doesn't apply to all gifts you make during your lifetime. You're free to give away money or property in relatively small increments as long as those increments don't add up to a mountain of generosity. You can even give certain gifts of more significant value because they're exceptions to the usual rules.
Whether a gift is taxable comes down to three factors: who received it, its fair market value, and whether it was a present interest gift or a future interest gift.
The Recipient of the Gift
All gifts made to your spouse are exempt from federal gift taxes as long as your spouse is a U.S. citizen. The federal unlimited marital deduction allows spouses to give property to each other without taxation either before or after death.
As of 2018, you can give up to $152,000 a year to your spouse if she is not a U.S. citizen. This exemption increases annually.
What's Fair Market Value?
The Internal Revenue Service defines fair market value as what one individual might pay 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 and in the same condition.
If you give cash, there's no dispute as to its value. If you give someone $10,000 and receive nothing in return, you've made a $10,000 gift.
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 didn't 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 free to use for her own enjoyment and benefit immediately—no strings attached.
If the recipient doesn't have complete use and enjoyment of the gift until some future point in time, it's a future interest gift.
Common examples of a future interest gift are reserving a life estate in real estate and funding a trust. In either case, your beneficiary typically doesn't become the full and vested owner until your death.
Future interest gifts don't qualify for the unlimited marital deduction or for any other gift tax exclusions and exemptions either. 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, the United States Gift (and Generation-Skipping Transfer) tax return.
The Annual Exclusion
Federal law exempts the first $15,000 you give per person per year as of 2018. This annual exclusion from the 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 $115,000 to your son for the purchase of a home, $15,000 of the gift is free and clear of the federal gift tax but the remaining $100,000 is considered 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 $15,000 is free and clear of the federal gift tax and $95,000 is a taxable gift.
But if you gift him $15,000 in December and $15,000 a month later in January of the following year, neither gift is taxable because they're both covered by the annual exclusion as long as these are the only two gifts you make in the two-year period. And even then, you can avoid paying any tax.
The Lifetime Exemption
Federal tax law also offers a lifetime exemption from the gift tax but it's shared with the estate tax. This lifetime exclusion is sometimes called the Unified Tax Credit. It's 11.18 million as of 2018.
If you exceed the $15,000 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. But each time you apply the lifetime credit, the amount of the gift is subtracted from it, leaving less of the exclusion to shelter your estate from taxation at the time of your death.
Only very sizeable estates should be affected by this rule, however.
Exceptions to the Gift Tax
Certain types of gifts are exempt 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 also exempt. You must pay the medical care provider or the educational institution directly, however.
NOTE: Tax laws change periodically so you should always 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.