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What Is the Gift
Tax?
The federal gift tax
applies to gifts of property or money
while the donor is living. The federal
estate tax, on the other hand, applies
to property conveyed to others (with the
exception of a spouse) after a person’s
death.
The gift tax applies only
to the donor. The recipient is under no
obligation to pay the gift tax, although
other taxes, such as income tax, may
apply. The federal estate tax affects
the estate of the deceased and can
reduce the amount available to heirs.
In theory, any gift is
taxable, but there are several notable
exceptions. For example, gifts of
tuition or medical expenses that you pay
directly to a medical or educational
institution for someone else are not
considered taxable. Gifts to a spouse
who is a U.S. citizen, gifts to a
qualified charitable organization, and
gifts to a political organization are
also not subject to the gift tax.
You are not required to
file a gift tax return unless any single
gift exceeds the annual
exclusion amount for that
calendar year. The exclusion amount
($12,000 in 2007 and 2008), is indexed
annually for inflation. A separate
exclusion is applied for each recipient.
In addition, gifts from spouses are
treated separately; so together, each
spouse can gift an amount up to the
annual exclusion amount to the same
person.
Gift taxes are determined
by calculating the tax on all gifts made
within the tax year that are above the
annual exclusion amount, and then adding
that amount to all the gift taxes from
gifts above the exclusion limit from
previous years. This number is then
applied toward an individual’s lifetime
applicable exclusion amount.
If the cumulative sum exceeds the
lifetime exclusion, you may owe gift
taxes.
For gift tax purposes in
2007, 2008, and 2009, the applicable
credit is $345,800 and the applicable
exclusion amount is $1 million. These
amounts are higher for the estate tax.
According to the IRS,
most gifts are not subject to the gift
tax, and only about 2% of estates are
subject to the estate tax.
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