The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced interest loan, you may be making a gift.

The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule.

Generally, the following gifts are not taxable gifts:

1. The first $10,000 you give someone during a calendar year (the annual exclusion),
2. Tuition or medical expenses you pay for someone (the educational and medical exclusions),
3. Gifts to your spouse,
4. Gifts to a political organization for its use, and
5. Gifts to charities.

Annual exclusion. A separate $10,000 annual exclusion applies to each person to whom you make a gift. Therefore, you generally can give up to $10,000 each to any number of people each year and none of the gifts will be taxable.

If you are married, both you and your spouse can separately give up to $10,000 to the same person each year without making a taxable gift. If one of you gives more than $10,000 to a person during a year, see Gift Splitting, later.

Inflation adjustment. After 1998, the $10,000 annual exclusion may be increased due to a cost-of-living adjustment. See the instructions for Form 709 for the amount of the annual exclusion for the year you make the gift.

Example 1. You give your niece a cash gift of $8,000. It is your only gift to her this year. The gift is not a taxable gift because it is not more than the $10,000 annual exclusion.

Example 2. You pay the $11,000 college tuition of your friend. Because the payment qualifies for the educational exclusion, the gift is not a taxable gift.

Example 3. In 1998, you give $25,000 to your 25-year-old daughter. The first $10,000 of your gift is not subject to the gift tax because of the $10,000 annual exclusion. The remaining $15,000 is a taxable gift. As explained later under Applying the Unified Credit to Gift Tax, you may not have to pay the gift tax on the remaining $15,000. However, you do have to file a gift tax return.

More information. Get Form 709 and its instructions for more information about taxable gifts.

Gift Splitting

If you or your spouse make a gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both of you must consent (agree) to split the gift. If you do, you each can take the $10,000 annual exclusion for your part of the gift.

Gift splitting allows married couples to give up to $20,000 to a person annually without making a taxable gift.

If you split a gift you made, you must file a gift tax return to show that you both agree to use gift splitting. You must file a return even if half of the split gift is less than $10,000. If the only reason you must file a gift tax return is because you and your spouse are splitting a gift, you may use Form 709-A. See the form instructions for who can use that form. This form is shorter and simpler than Form 709.

Example. Harold and his wife, Helen, agree to split the gifts that they made during 1998. Harold gives his nephew, George, $17,000, and Helen gives her niece, Gina, $12,000. Although each gift is more than $10,000, by gift splitting they can make these gifts without making a taxable gift.

Harold's gift to George is treated as one-half ($8,500) from Harold and one-half ($8,500) from Helen. Helen's gift to Gina is also treated as one-half ($6,000) from Helen and one-half ($6,000) from Harold. In each case, because one-half of the split gift is not more than the $10,000 annual exclusion, it is not a taxable gift. However, each of them must file a gift tax return.

Applying the Unified Credit to Gift Tax

After you determine which of your gifts are taxable, you figure the amount of gift tax on the total taxable gifts and apply your unified credit for the year.

Example. In 1998, you give your niece, Mary, a cash gift of $8,000. It is your only gift to her this year. You pay the $11,000 college tuition of your friend, David. You give your 25-year-old daughter, Lisa, $25,000. You also give your 27-year-old son, Ken, $25,000. Before 1998, you had never given a taxable gift. You apply the exceptions to the gift tax and the unified credit as follows:

1. Apply the educational exclusion. Payment of tuition expenses is not subject to the gift tax. Therefore, the gift to David is not a taxable gift.
2. Apply the $10,000 annual exclusion. The first $10,000 you give someone during a year is not a taxable gift. Therefore, your $8,000 gift to Mary, the first $10,000 of your gift to Lisa, and the first $10,000 of your gift to Ken are not taxable gifts.
3. Apply the unified credit. The gift tax on $30,000 ($15,000 remaining from your gift to Lisa plus $15,000 remaining from your gift to Ken) is $6,000. You subtract the $6,000 from your unified credit of $202,050 for 1998. The amount of unified credit that you can use against the gift tax in a later year is reduced by $6,000.

You do not have to pay any gift tax this year. However, you do have to file Form 709.

Filing a Gift Tax Return

Generally, you must file a gift tax return on Form 709 if:

1. You gave more than $10,000 (annual exclusion) during the year to someone (other than your spouse),
2. You and your spouse are splitting a gift (you may be able to use Form 709-A),
3. You gave someone (other than your spouse) a gift that he or she cannot actually possess, enjoy, or receive income from until sometime in the future, or
4. You gave your spouse an interest in property that will be ended by some future event.

You do not have to file a gift tax return to report gifts to (or for the use of) political organizations and gifts made by paying someone's tuition or medical expenses.

You also do not need to report deductible gifts made to charities of:

1. Your entire interest in property, if no other interest has been transferred for less than adequate consideration or for other than a charitable use, or
2. A qualified conservation contribution that is a restriction (granted forever) on the use of real property.

More information. If you need to file a gift tax return, you should get Form 709 and its instructions or Form 709-A.

Previous | First | Next

Publication Index | 2001 Tax Help Archives | Tax Help Archives | Home