With some exceptions, all monetary gifts larger than a certain amount are subject to federal gift taxes. Those taxes, however, aren't paid by the recipient, but by the giver. It's the giver's responsibility to keep track of all gifts -- how much, and to whom -- and to file a gift tax return if necessary.
Every year, you can give gifts up to a certain amount without triggering the federal gift tax. As of 2012, that amount was $13,000 per person, per year. For example, you could give your niece $13,000 to buy a car, free of gift tax. The limit applies to the total of all gifts in a year to a single recipient. For example, if you gave your niece $13,000 in January for the car and another $10,000 again in June as a down payment for a condo, the total gift to her would be $23,000, of which $10,000 would be subject to the gift tax. If you also wanted to give your nephew $10,000 that same year for a honeymoon cruise, that gift would not be subject to tax.
Some gifts are excluded from tax regardless of the amount. Gifts from one spouse to another don't count, as long as the spouse is a U.S. citizen. Gifts to charities and political organizations aren't taxed. Paying for someone else's education is also not considered a taxable gift, although the exclusion applies only to tuition -- not room and board, books or other expenses -- and only if the money is paid directly to the school, not to the student. Paying someone else's medical expenses is also not considered a taxable gift, so long as the money is paid directly to the care provider, not the patient.
It's up to gift givers to report and pay gift taxes. Givers pay those taxes by filing a gift tax return, using Internal Revenue Service Form 709. It's due on April 15 -- the same date as income taxes -- in the year after the year in which you made the gifts. Gift tax rates range from 18 percent to 35 percent, depending on the size of the gift. At the time of publication, only one state, Connecticut, had a separate gift tax. As with the federal gift tax, it applies to gift givers, not recipients.
Couples can give twice the annual limit to a single person without triggering the tax, and a couple can receive twice the limit from any one donor. Suppose you and your spouse want to give your newly married daughter and her husband a little nest egg. If the annual gift limit is $13,000, you could actually give them a total of $52,000 tax-free: $13,000 from you to your daughter, $13,000 from you to your son-in-law, $13,000 from your spouse to your daughter, and $13,000 from your spouse to your son-in-law.
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