What Is a Gift?

A gift is property, money, or assets that one person transfers to another while receiving nothing or less than fair market value in return. Under certain circumstances, the IRS collects a tax on gifts. Transfers of money or property that are given freely or exchanged for less than market value may be subject to the gift tax if the donor has exceeded the annual or lifetime gift exemption.

Key Takeaways

  • A gift is an offering of money or assets made by one person to another in which nothing of comparable value is given, or expected to be given, in return.
  • Some gifts are tax-free for both the donor and the recipient, but certain gifts may warrant the payment of taxes.
  • Gifts that are made after the donor has already surpassed the annual or lifetime gift exemption would incur taxes.
  • Estate planning and other financial planning that involves the strategic giving of gifts can make it possible for an individual or couple to save on gift taxes.

How a Gift Works

A gift differs from other types of financial vehicles such as investments and loans because a gift, in the strict technical definition, does not involve any expectation or obligation of repayment or a profit in return. A gift in its purest sense is given as a philanthropic gesture or an act of generosity. A gift can also be given to a charitable organization so the donor can benefit from tax deductions.

Giving an individual a gift beyond the gift tax limit in a single year means you have to fill out a gift tax form when filing your returns, but it doesn't mean you have to pay taxes—unless you've exceeded the lifetime limit.

Gifts and Tax Considerations

A financial gift can involve specific tax implications for the parties involved, although this tends to mainly impact the person or party who provided the gift. Tax penalties or implications generally don’t apply to relatively small gifts. So you would only need to worry about a tax fee kicking in if you give a financial gift of a substantial amount.

For the 2020 tax year, that minimum threshold is a gift of at least $15,000 made in a single calendar year by an individual, and $30,000 from a couple making a gift using money from joint resources or assets. There is a cap of $11.58 million on lifetime gifting without reporting to the IRS, as of 2020.

That means gifts under those amounts are excluded from being considered by the IRS for gift taxes. However, there is also a lifetime gift exclusion fee, meaning an amount that you are allowed to give over the course of your life that is excluded from gift taxes.

By employing careful planning and making financial gifts strategically, it is possible for an individual or couple to bestow quite a bit of money in financial gifts without incurring a large tax bill.

Special Considerations

If you receive a gift, you generally aren't required to report it as income; it is the gift giver who is responsible for paying any tax and filing a gift tax return. Gifts of any amount to spouses or political organizations, and payments of tuition and medical expenses on behalf of others, are generally not taxable as gifts.

In the case of gifts used for medical or educational expenses, the gifts must be paid directly to the hospital, school, or other provider in order for the tax exclusion limits to be inapplicable. Estate planning can help wealthy individuals avoid paying gift taxes.

Example of Gifts

An example of a gift is a wedding gift made to a newly-married couple. In some cases, this may take the form of an object, such as an expensive vase or cutlery to help the couple set up their home.

Others may prefer to hand out cash gifts by stuffing envelopes with money. As long as the fair market value of gifts, made either in cash or any other format, does not exceed $15,000, they are not required to be reported to the IRS.

Gifts can also be made in other forms. Suppose Donald's father gifts him with $12 million on his 17th birthday in 2020. Then the gift is subject to IRS taxes because it exceeds the $11.58 million lifetime tax exemption limit set by the agency.

Consider another case, where Donald's father gifts him with $15,000 each year from the day he turned one and continues the practice until the age of 25. This gift does not need to be reported to the IRS because it does not exceed the $15,000 limit for individual gifting set by the IRS.