A gift tax or known originally as inheritance tax is a tax imposed on the transfer of ownership of

property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, r ...

during the giver's life. The United States

Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory t ...

says that a gift is "Any transfer to an

individual An individual is that which exists as a distinct entity. Individuality (or self-hood) is the state or quality of being an individual; particularly (in the case of humans) of being a person unique from other people and possessing one's own need ...

, either directly or indirectly, where full compensation (measured in money or money's worth) is not received in return." When a taxable gift in the form of cash, stocks, real estate, gift cards, or other

tangible Tangibility is the property of being able to be perceived by touch. A commonplace understanding of "tangibility" renders it as an attribute allowing something to be perceptible to the senses. In criminal law, one of the elements of an offense ...

intangible property Intangible property, also known as incorporeal property, is something that a person or corporation can have ownership of and can transfer ownership to another person or corporation, but has no physical substance, for example brand identity or ...

is made, the tax is usually imposed on the

donor A donor in general is a person, organization or government which donates something voluntarily. The term is usually used to represent a form of pure altruism, but is sometimes used when the payment for a service is recognized by all parties as rep ...

(the giver) unless there is a retention of an interest which delays completion of the gift. A transfer is "completely gratuitous" when the donor receives nothing of value in exchange for the given property. A transfer is "gratuitous in part" when the donor receives some value but the value of the property received by the donor is substantially less than the value of the property given by the donor. In this case, the amount of the gift is the difference. In the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

, the

gift tax In economics, a gift tax is the tax on money or property that one living person or corporate entity gives to another. A gift tax is a type of transfer tax that is imposed when someone gives something of value to someone else. The transfer must ...

is governed by Chapter 12, Subtitle B of the

Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 2 ...

. The tax is imposed by section 2501 of the Code. For the purposes of taxable income, courts have defined a "gift" as the proceeds from a "detached and disinterested generosity." Gifts are often given out of "affection, respect, admiration, charity or like impulses." Generally, if an interest in property is transferred during the giver's lifetime (often called an inter vivos gift), then the gift or transfer would not be subject to the

estate tax An inheritance tax is a tax paid by a person who inherits money or property of a person who has died, whereas an estate tax is a levy on the estate (money and property) of a person who has died. International tax law distinguishes between an ...

. In 1976, Congress unified the gift and estate tax regimes, thereby limiting the giver's ability to circumvent the estate tax by giving during his or her lifetime. Some differences between estate and gift taxes remain, such as the effective tax rate, the amount of the credit available against tax, and the basis of the received property. There are also types of gifts which will be included in a person's estate, such as certain gifts made within the three-year window before death and gifts in which the donor retains an interest such as gifts of remainder interests that are not either ''qualified'' remainder trusts or charitable remainder trusts. The remainder interest gift tax rules impose the tax on the transfer of the entire value of the trust by assigning a zero value to the interest retained by the donor.

Non-taxable gifts

Generally, the following gifts are not taxable gifts: * Gifts that are not more than the annual exclusion for the calendar year (last raised to $15,000 per recipient for any one donor, beginning for 2018) * Gifts to a political organization for its use * Gifts to charities * Gifts to one's (US Citizen) spouse * Tuition or medical expenses one pays directly to a medical or educational institution for someone. Donor must pay the expense directly. If donor writes a check to donee and donee then pays the expense, the gift may be subject to tax.

Exemptions

There are two levels of exemption from the gift tax. First, gifts of up to the annual exclusion ($11,000 per recipient for the years 2002–2005, for 2006–2008, for 2009–2012, for 2013–2017, for 2018-2021 and for 2022) incur no tax or filing requirement. By splitting their gifts, married couples can give up to twice this amount tax-free. Each giver and recipient pair has its own annual exclusion; a giver can give to any number of recipients and the exclusion is not affected by other gifts that recipient may have received from other givers. Second, gifts in excess of the annual exclusion may still be tax-free up to the lifetime estate basic exclusion amount ($11.58 million for 2020). For estates over that amount, however, such gifts might result in an increase in estate taxes. Taxpayers that expect to have a taxable estate may sometimes prefer to pay gift taxes as they occur, rather than saving them up as part of the estate. Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of million may be subject to a

generation-skipping transfer tax The U.S. generation-skipping transfer tax ( "GST tax") imposes a tax on both outright gifts and transfers in trust to or for the benefit of unrelated persons who are more than 37.5 years younger than the donor or to related persons more than one ge ...

if certain other criteria are met.

Non-residents

For gift tax purposes, the test is different in determining who is a non-resident alien, compared to the one for income tax purposes (the inquiry centers around the decedent's domicile). This is a subjective test that looks primarily at intent. The test considers factors such as the length of stay in the United States; frequency of travel, size, and cost of home in the United States; location of family; participation in community activities; participation in U.S. business and ownership of assets in the United States; and voting. It is possible for a foreign citizen to be considered a U.S. resident for income tax purposes but not for gift tax purposes. If a person is a non-resident alien for purposes of gift tax, taxation of gifts is determined in a different way. If the property is not located in the U.S., there is no gift tax. If it is

, such as shares in U.S. corporations and interests in partnerships or LLCs, there is no gift tax. Non-resident alien donors are allowed the same annual gift tax exclusion as other taxpayers ($14,000 per year for 2013 through 2016). Non-resident alien donors do not have a lifetime unified credit. Non-resident alien donors are subject to the same rate schedule for gift taxes. U.S. citizens and residents must report gifts from a non-resident alien that are in excess of $100,000 o
Form 3520

Noncitizen spouse

According t
26 USC section 2523(i)
gifts to a non-U.S.-citizen spouse are not generally exempt from gift tax. Instead, they are exempt only up to a specified amount foreseen b
26 USC section 2503 (b)
(that is, up to $159,000 for 2021 ).

U.S. Federal gift tax contrasted with U.S. Federal income tax treatment of gifts

Pursuant to 26 USC 102(c), the receipt of a gift, bequest, devise, or inheritance is not included in gross income. Thus, a taxpayer does not include the value of the gift when filing an income tax return. Although many items might appear to be gift, courts have held the most critical factor is the transferor's intent. The transferor must demonstrate a "detached and disinterested generosity" when giving the gift to exclude the value of the gift from the taxpayer's gross income. The courts have defined "gift" as proceeds from a "detached and disinterested generosity." "Gifts" received from employers that benefit employees are not excluded from taxation. clearly states employers cannot exclude as a gift anything transferred to an employee that benefits the employee. Consequently, an employer cannot "gift" an employee's salary to avoid taxation. Gifts from certain parties will always be taxed for U.S. Federal income tax purposes. Under Internal Revenue Code section 102(c), gifts transferred by or for an employer to, or for the benefit of, an employee cannot be excluded from the gross income of the employee for Federal income tax purposes. While there are some statutory exemptions under this rule for de minimis fringe amounts, and for achievement awards, the general rule is the employee must report a "gift" from the employer as income for Federal income tax purposes. The foundation for the preceding rule is the presumption that employers do not give employees items of value out of "detached and disinterested generosity" due to the existing employment relationship. Under Internal Revenue Code section 102(b)(1), income subsequently derived from any property received as a gift is not excludable from the income taxed to the recipient. In addition, under Internal Revenue Code section 102(b)(2), a donor may not circumvent this requirement by giving only the income and not the property itself to the recipient. Thus, a gift of income is always income to the recipient. Permitting such an exclusion would allow the donor and the recipient to avoid paying taxes on the income received, a loophole Congress has chosen to eliminate.

History

The gift tax is a backstop to the United States estate tax. Without the gift tax, large estates could be reduced by simply giving the money away prior to death, and thus escape any potential estate tax. Gifts above the annual exemption amount act to reduce the lifetime gift tax exclusion. Congress initially passed the gift tax in 1932 at a much lower rate than the estate tax, a full 25% under the estate tax rate, while also providing a exemption, separate from the exemption under estate tax. The benefits were clear: a gift would be taxed only , effectively only 23.0%, well below the estate tax rate. The intention was to rapidly generate revenue in the

Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...

, effectively encouraging avoidance of the estate tax by doing so, while lawmakers at the same time publicly, and in both House and Senate, proclaimed the exact opposite objective. Moreover, this was directly at the expense of state tax revenues, as well as of future federal tax revenues. The primary beneficiaries were the wealthiest citizens, whom the estate tax was supposedly designed to target, since only they had enough money to freely make large gifts. This was the express intention.Cooper, p.915 fn 171.

Non-taxable gifts

Exemptions

Non-residents

Noncitizen spouse

U.S. Federal gift tax contrasted with U.S. Federal income tax treatment of gifts

History

See also

References

External links