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Knowing when to apply the gift tax

July 27, 2017


What do a baseball glove for your nephew, tuition for your daughter, and a savings bond for your spouse have in common? According to the IRS, they are all considered tax-free gifts. But not all gifts fall into the same category. Knowing when the federal gift tax applies may save you from trouble down the road and can influence the types of gifts given during the tax year.

Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you give a gift to someone else, the gift tax usually does not apply until the value of the gift exceeds the annual exclusion for the year. For 2015 the annual exclusion was 14,000 dollars.

If tuition is paid directly to an educational institution on behalf of someone else, that gift is not taxable. Likewise, if medical expenses are paid directly to a medical institution on behalf of someone else, that gift is also not taxable.  

Financial or other types of gifts given to a political organization for its use are not taxable.

Spouses can give a gift up to 28,000 dollars to a third party without making it a taxable gift as it is considered that one-half of the gift was given by each spouse.

Generally, the person who receives the gift will not have to pay taxes on it.

Making a gift does not ordinarily affect the givers taxes. The value of gifts given cannot be deducted on taxes unless the gift is a deductible charitable contribution.

However, not all gifts are tax free. A gift giver must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, in certain circumstances.

The gift tax may apply when you forgive a debt or give a loan that is interest-free or below the market interest rate.

If gifts were given to at least one person, other than a spouse, and the amount totaled to more than the annual exclusion for the year those gifts are subject to tax.

If someone, other than a spouse, is given a gift of a future interest that they can’t actually possess, enjoy, or from which they’ll receive income later, that gift is also subject to tax.

For more information, see Publication 559, Survivors, Executors, and Administrators.

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