- How Much Tax Do You Pay When You Give Large Sums of Money Away?
- How Many Gifts Can You Give Anyone at Any Time Without a Gift Tax?
- What If I Don't File a Gift Tax Return?
- How Much of a Gift Can You Give to Someone to Buy a House?
- Penalties for Failure to File a Gift Tax Return
- US Gift Tax Regulations
Most gifts are not large enough to qualify for the federal gift tax, which taxes gifts at the same rate as income. The IRS allows for an annual exclusion that enables you to give a maximum amount of money each year to an individual without triggering a gift tax. In addition, you have the option of using a lifetime exemption on gifts to prevent a tax charge.
The IRS sets an annual exclusion each year, making occasional adjustments based on changes in inflation. In 2012, the annual exclusion was set at $13,000, which was the number first established in 2009. You can give $13,000 to as many individuals as you like without worrying about gift tax.
If you give someone a gift greater than the annual exclusion, you can still avoid gift tax by using your so-called unified credit, which is $5.12 million at the time of publication. The amount of the unified credit is always the same as the amount a person's estate can shelter from estate tax. If you give large gifts during your lifetime and choose not to pay gift tax, this amount decreases the amount your estate can shelter from estate tax later. For example, if you give $2 million in gifts during your lifetime and choose not to pay gift tax, only $3.12 million of your estate is protected from estate tax when you die. The unified credit applies to all gifts above the annual exclusion. For example, suppose you gave gifts of $15,000 to two people. The sum of the amounts above $13,000, or $4,000 total, would count against the unified credit.
Gifts do not only apply to cash gifts. Non-cash gifts, such as property, also can be subject to the gift tax. In addition, the IRS considers a sale of property that is made at a price below the fair market value to be a gift. The IRS defines fair market value as the sale price that would be used between a willing buyer and a willing seller. Also, a loan of $10,000 or more with an interest rate below the private loan interest rate the IRS sets each month qualifies as a gift.
The IRS does allow for exceptions to the gift tax for certain types of gifts, which can exceed the annual exclusion. For instance, gifts made to a spouse are not taxed. Neither are gifts to a political organization or to a qualifying charity. In fact, gifts to a qualifying charity are tax deductible. You also can pay college tuition or medical expenses for someone else. However, you must pay the bills directly or the tax will apply.