Gift tax
Encyclopedia
A gift tax is a tax
imposed on the gratuitous transfer
of ownership of property. The United States Internal Revenue Service
says a gift is "Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return."
When a taxable gift in the form of cash, stocks, real estate, or other tangible or intangible property is made the tax is usually imposed on the donor
(the giver) unless there is a retention of an interest which delays completion of the gift. A transfer is completely gratuitous where the donor receives nothing of value in exchange for the gifted property. A transfer is gratuitous in part where 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 gift tax is governed by Chapter 12, Subtitle B of the Internal Revenue Code
. 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. In 1976, Congress unified the gift and estate taxes limiting the giver’s ability to circumvent the estate tax by gifting during his or her lifetime. Notwithstanding, there remain differences between estate and gift taxes 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 apply the gift tax on the entire value of the trust by assigning a zero value to the interest retained by the donor.
If an individual or couple makes gifts of more than the limit, gift tax is incurred. The individual or couple has the option of paying the gift taxes that year, or to use some of the "unified credit" that would otherwise reduce the estate tax. In some situations it may be advisable to pay the tax in advance to reduce the size of the estate.
In many instances, however, an estate planning strategy is to give the maximum amount possible to as many people as possible to reduce the size of the estate.
Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of $1 million may be subject to a generation-skipping transfer tax
if certain other criteria are met.
Some situations are clearer, however.
For example, Oprah's seemingly good deed of giving new cars to her audience does not satisfy this definition because of Oprah's interest in the promotional value that this event causes for her television show.
clearly states that 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.
In addition, policy reasons for the gift exclusion from gross income are unclear. It is said that no justification exists. It is also said that the exclusion is for administrative reasons, both for taxpayers and for the IRS. Without the exclusion taxpayers would have to keep track of all their gifts, including nominal ones, during the year, and this would create additional oversight problems for the IRS.
(quoting Commissioner v. LoBue, 351 U.S. 243 (1956)).
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 gifting 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.
. 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 to 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 $50,000 exemption, separate from the $50,000 exemption under estate tax. The benefits were clear: a $10,000,000 gift would be taxed only $2,300,000, effectively only 18.7%, well below the estate tax rate. The intention was to rapidly generate revenue in the Great Depression
, 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 cash enough to freely make large gifts. This was the express intention.
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
imposed on the gratuitous transfer
Gift (law)
A gift, in the law of property, is the voluntary transfer of property from one person to another without full valuable consideration...
of ownership of property. The United States Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
says a gift is "Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return."
When a taxable gift in the form of cash, stocks, real estate, or other tangible or intangible property is made the tax is usually imposed on the donor
Donation
A donation is a gift given by physical or legal persons, typically for charitable purposes and/or to benefit a cause. A donation may take various forms, including cash, services, new or used goods including clothing, toys, food, and vehicles...
(the giver) unless there is a retention of an interest which delays completion of the gift. A transfer is completely gratuitous where the donor receives nothing of value in exchange for the gifted property. A transfer is gratuitous in part where 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 gift tax is governed by Chapter 12, Subtitle B of the Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code 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 26 of the United States Code...
. 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
Inter vivos
Inter vivos is a legal term referring to a transfer or gift made during one's lifetime, as opposed to a testamentary transfer ....
) then the gift or transfer would not be subject to the estate tax. In 1976, Congress unified the gift and estate taxes limiting the giver’s ability to circumvent the estate tax by gifting during his or her lifetime. Notwithstanding, there remain differences between estate and gift taxes 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 apply the gift tax on 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
- Gifts to a political organization for its use
- Gifts to charities
- Gifts to one's (US taxpayer) spouse
- Tuition or medical expenses one pays directly to a medical or educational institution for someone
Gift tax exemptions
There are two levels of exemption from the gift tax. First, transfers of a present interest up to $13,000 per person per year (as of 2011) are not subject to the tax ("present interest" is defined as: when the recipient of the gift can "immediately and without restriction use, possess, or enjoy the gifted property", if it's not this "present interest" then it's a "future interest" and therefore the annual exclusion amount of $13,000 (2011) is NOT available to use as a deduction from the gift). An individual can make gifts up to this amount to as many people as he/she wishes each year. A married couple can pool their individual gift exemptions to make gifts worth up to $26,000 per recipient per year without incurring any gift tax. For 2011 and 2012, the lifetime gift tax exemption is $5,000,000, which is the same as the federal estate tax exemption. The lifetime gift tax exemption is tied directly to the federal estate tax exemption such that if you gift away any amount of your lifetime gift tax exemption, then this amount will be subtracted from your estate tax exemption after you die.If an individual or couple makes gifts of more than the limit, gift tax is incurred. The individual or couple has the option of paying the gift taxes that year, or to use some of the "unified credit" that would otherwise reduce the estate tax. In some situations it may be advisable to pay the tax in advance to reduce the size of the estate.
In many instances, however, an estate planning strategy is to give the maximum amount possible to as many people as possible to reduce the size of the estate.
Furthermore, transfers (whether by bequest, gift, or inheritance) in excess of $1 million may be subject to a generation-skipping transfer tax
Generation-skipping transfer tax
The U.S. Generation-skipping transfer 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 generation younger than the donor, such as grandchildren...
if certain other criteria are met.
Tax deductibility for gifts
Pursuant to , property acquired by gift, bequest, devise, or inheritance is not included in gross income and thus a taxpayer does not have to include the value of the property when filing an income tax return. Although many items might appear to be gift, courts have held that the most critical factor is the transferor's intent. Bogardus v. Commissioner, 302 U.S. 34, 43, 58 S.Ct. 61, 65, 82 L.Ed. 32. (1937). The transferor must demonstrate a "detached and disinterested generosity" when giving the gift to actually exclude the value of the gift from the taxpayer's gross income. Commissioner of Internal Revenue v. LoBue, 352 U.S. 243, 246, 76 S.Ct. 800, 803, 100 L.Ed. 1142 (1956). Unfortunately, the court's articulation of what exactly satisfies a "detached and disinterested generosity" leaves much to be desired.Some situations are clearer, however.
- "Gifts" received at promotional events are not excluded from taxation:
For example, Oprah's seemingly good deed of giving new cars to her audience does not satisfy this definition because of Oprah's interest in the promotional value that this event causes for her television show.
- "Gifts" received from employers that benefit employees are not excluded from taxation:
clearly states that 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.
In addition, policy reasons for the gift exclusion from gross income are unclear. It is said that no justification exists. It is also said that the exclusion is for administrative reasons, both for taxpayers and for the IRS. Without the exclusion taxpayers would have to keep track of all their gifts, including nominal ones, during the year, and this would create additional oversight problems for the IRS.
U.S. Federal gift tax contrasted with U.S. Federal income tax treatment of gifts
The treatment of a gift for U.S. gift tax purposes (the transfer tax) should not be confused with the treatment of gifts for other tax purposes. For example, for U.S. income tax purposes, most gifts are excluded (under Internal Revenue Code section 102) from the gross income of the recipient, and thus are not taxed as income. For the purposes of taxable income, courts have defined "gift" as proceeds from a "detached and disinterested generosity." See Commissioner v. DubersteinCommissioner v. Duberstein
Commissioner v. Duberstein, , was a United States Supreme Court case dealing with the exclusion of "the value of property acquired by gift" from the gross income of an income taxpayer....
(quoting Commissioner v. LoBue, 351 U.S. 243 (1956)).
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
De minimis fringe benefit
De Minimis Fringe Benefits are minimal or smallish perks provided by an employer; de minimis is legal Latin for "minimal".-Definition:...
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 gifting 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 back stop to the United States estate taxEstate tax in the United States
The estate tax in the United States is a tax imposed on the transfer of the "taxable estate" of a deceased person, whether such property is transferred via a will, according to the state laws of intestacy or otherwise made as an incident of the death of the owner, such as a transfer of property...
. 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 to 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 $50,000 exemption, separate from the $50,000 exemption under estate tax. The benefits were clear: a $10,000,000 gift would be taxed only $2,300,000, effectively only 18.7%, well below the estate tax rate. The intention was to rapidly generate revenue in the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, 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 cash enough to freely make large gifts. This was the express intention.
External links
- IRS article, Estate and Gift Taxes
- IRS publication 950, Introduction to Estate and Gift Taxes
- IRS publication 950, Introduction to Estate and Gift Taxes
- IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return
- Instructions for Form 709, Instructions for Form 709
- Instructions for Form 709, Instructions for Form 709