Gift Tax Law

There were some rumors that the Economic Growth and Tax Relief Reconciliation Act of 2001 would abolish gift tax but that never really happened. As a matter of fact, the Act retained the $10,000 per year per beneficiary exemption. On the other hand, the lifetime exemption from gift tax is still in the range of $1 million. Gifts above $1 million are subject to tax.

Income Tax Information

Purpose of Gift Tax

Gift taxes supplement the Estate Tax. These taxes are placed on gifts you give to any individual while you are still alive. You have the option of giving away $12,000 in cash or assets to as many individuals you want annually without incurring any Gift Tax liability.

Giving a Gift

According to gift tax law, married couples can give up to $24,000 annually as a gift. They can give as much as they want to as many individuals they want but if they cross the limit of $24,000 the excess amount is cut from the lifetime gift-tax exclusion. If at any point the gifts you gave during your lifetime exceed $1 million, you have to pay taxes on that amount. The transfer of gifts between spouses is totally gift tax free.

Structure of the Gift Tax

Unlike most tax structure, the gift and estate taxes are unified and integrated into one tax system. Both gift and federal estate tax impose a tax on transferring assets. Gift tax catches transfers made during your life and estate tax catches transfers at death. The rates of both estate and gift tax are pretty much identical.

Calculating the Gift Taxes

Gift taxes are calculated by the actual property value transferred. Gift tax is not applicable on transfer of services; it is only applicable on transfer of property or money. The computation of federal gift taxes is quite simple. You need to deduct the yearly $12,000 exclusion from taxable gifts and any gifts that you have given to your spouse. You also need to deduct the gifts and donations that you have given to any charity. For inflation, the dollar amount for tax-free gifts is indexed on a yearly basis. Gifts under the indexed amount do not really count in the calculation of estate tax.