Understanding the Federal Gift Tax

Understanding the Federal Gift Tax

Understanding the Federal Gift Tax

Understanding the Federal Gift Tax – the federal gift tax applies to transfers of wealth by a person while they are still alive. These transfers are called inter vivos (during life) gifts. An inter vivos gift typically occurs when two things happen:

  1. the giver (or donor) receives less than the full value of the property in return for property transferred, and
  2. the donor gives up control over the property.

Understanding the Federal Gift Tax

For tax law purposes, the donor’s intent or desire to make a gift are irrelevant, so it is easy for gifts to be made inadvertently. As an example, if a person forgives a legal debt a friend owes to her, she will have made a gift to that friend. Or, if she pays a friend’s expenses for which she has no legal obligation, she will have made a gift. Or, if a person trades his car worth $18,000 for his friend’s car worth $25,000, without any other exchanging hands, his friend will have made a gift of $7,000.

Exemptions for tuition or Medical Expense Payments

Many retirees like to help their grandchildren with educational tuition. The stratospheric levels of current educational costs make this help welcome and often necessary. In other cases, the retiree may want to help defray the cost of medical treatment incurred by a relative or close friend. Fortunately, an exemption in the tax code makes it possible to do both in any amount without having to pay gift tax or file a gift tax return. The entire amount paid by the giver is excluded if payment is made directly and exclusively to the educational institution or health care provider.

Annual Exclusion

Under current tax law, an individual can give up to a certain amount per year to as many individuals – even – nonrelatives – as they wish without incurring a gift tax. This value is known as the annual exclusion and is subject to indexing. It increases, however, only when inflation would increase the base amount to the next lowest multiple of $1,000. The maximum annual exclusion for gifts made in 2021 is $15,000.

Understanding the Federal Gift Tax

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