Tax Planning - Gift Tax - What is it?

What is a Gift Tax?

A 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. You may be making it if you sell something at less than its full value or if you make an interest-free or reduced interest loan.

As a rule of thumb, any gift is a taxable gift. However, there are exceptions to this rule. Generally, the following are not taxable gifts:

• Gifts that are not more than the annual exclusion for the calendar year.
  


• Tuition or medical expenses you pay for someone (the educational and medical exclusions).
  


• Gifts to your spouse.
  


• Gifts to a political organization for its use.
  


• Gifts to qualified charities (a deduction is available for these amounts).

What is the Annual Exclusion?

An annual exclusion applies to each person to whom you make a gift. The annual exclusion as of 2007 is $12,000. Therefore, you generally can give up to $12,000 each to any number of people and none of the gifts will be taxable. If you are married, both you and your spouse can separately give up to $12,000 to the same person without making a taxable gift. These to individuals are not deductible on the donor's income tax returns.

According to the IRS, if you give someone money or property during your life, you may be subject to federal gift tax. The money and property you own when you die (known as your estate) may be subject to federal estate tax.

Most are not subject to the gift tax and most estates are not subject to the estate tax. Only about 2% of all estates are subject to the estate tax. You do not need to file a return unless you give someone, other than your spouse, money or property worth more than the annual exclusion ($12,000) for that year. Although a return may be required, no actual tax will become payable until the cumulative lifetime taxable gifts exceed the applicable exclusion amount. The donor is primarily responsible for the payment of them.

Hilary Basile is a writer for MyGuidesUSA.com. At MyGuidesUSA.com (http://www.myguidesusa.com), you will find valuable tips and resources for handling life's major events. Whether you're planning a wedding, buying your first home, anxiously awaiting the birth of a child, contending with a divorce, searching for a new job, or planning for your retirement, you'll find answers to your questions at MyGuidesUSA.com.

Find tax planning resources and tips at http://taxplanning.myguidesusa.com