What is the Federal Gift Tax?
The gift tax, reported on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, is one part of the Federal transfer tax system, which is a mechanism for taxing the transfer of assets from one person to another. The gift tax is incurred for inter vivos transfers, which is to say, transfers of property during the donor's lifetime.
A gift is taxed based on the year in which the gift is transferred or completed. The Economic Growth and Tax Relief Reconciliation Act (EGTRRA), passed in 2001, gradually increased the lifetime exemption amounts for gift taxes to $1,000,000, with a maximum tax rate of 35 percent. As a result of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, the lifetime exemption was increased to $5.0 million ($10.0 million for couples), to be indexed for inflation.
It is important to note that three types of transfers are not defined as “gifts” and, therefore, are not subject to the gift tax under the Internal Revenue Code (IRC). First, gifts to political organizations are not taxed when they meet the criteria of IRC section 527(e) (1). Second, gifts of tuition made to a qualifying educational institution on behalf of an individual are not taxable, as long as the payment is made directly to the educational institution. Finally, the gift tax does not apply to the amount of medical expenses on behalf of an individual, when paid directly to the individual or to the medical institution that provided care.
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