What Is a Gift Tax?

A gift tax is a federal tax applied to an individual giving anything of value to another person. For something to be considered a gift, the receiving party cannot pay the giver full value for the gift, though they may pay an amount less than its full value.

The giver of the gift is required to pay the gift tax. Under special circumstances, the receiver of the gift may pay the federal gift tax.

Key Takeaways

  • The gift tax is a federal tax levied on a taxpayer who gifts money or other items of value, such as property.
  • For tax purposes, the receiver cannot pay full value for the gift for it to be considered a gift.
  • For 2019 and 2020 the annual gift exclusion is $15,000 per recipient; the lifetime exemption is $11.4 million in 2019 ($11,580,000 in 2020) for a single donor.
  • Gifts made to spouses who are U.S. citizens, to political organizations for use by the organization, and for medical and tuition-related expenses on behalf of the recipient are excluded from the gift tax, along with gifts that are valued at less than the annual exclusion amount.

How a Gift Tax Works

The federal gift tax was created to prevent taxpayers from gifting their money and items of value to others to avoid paying taxes. To prevent undue hardship to the recipient and oblige givers to honor their tax liability, the gift tax is applied to the gift giver.

The following are generally not subject to gift tax:

  • Gifts to the donor’s spouse are excluded if the spouse is a U.S. citizen. As of 2019 noncitizen spouses cannot receive more than $155,000 without being subject to the gift tax (rising to $157,000 in 2020).
  • Gifts to a political organization for use by the political organization are excluded.
  • Gifts that are valued at less than the annual gift tax exclusion for a given year are excluded.
  • Medical and educational expenses—payments made by a donor to a person or an organization, such as a college, doctor, or hospital—are excluded.
  • Charitable gifts are deducted from the value of gifts made.

As the regulations applied to gift taxes are very complicated, it is best to check with your respective tax authorities if you have given anyone a gift valued at more than $15,000, the gift tax maximum in effect since the 2018 tax year. This means that an individual has been able to give another individual $15,000 or less per year without incurring a gift tax.

As of 2019, a single donor can gift up to $11,400,000 ($11,580,000 in 2020) in their lifetime before the gift tax is applied. Annual limits still apply; the lifetime exemption applies to amounts exceeding annual exclusions.

Spouses can each give the maximum of $15,000 to the same recipient, which, in effect, is a $30,000 gift from the couple.

Note that even if they file a joint tax return, spouses can each give $15,000 to the same recipient, raising that gift to $30,000 per year. This is known as “gift splitting” and enables wealthy couples to give substantial annual gifts to children, grandchildren, and others. This can be on top of, say, tuition paid directly to a grandchild’s school or college, which comes under the gift tax exemption.

Example of the Gift Tax

Taxpayer A gives $20,000 to each of five recipients in 2020. Because the annual exclusion limit is $15,000 per person, $25,000 of the total amount given is not excluded. However, the non-excluded amount reduces the lifetime exemption amount. So, after making these gifts, Taxpayer A has $11,555,000 remaining of the exemption to give before paying gift taxes.