In some countries, a tax is levied on those who give a large gift of money or property to another person without receiving anything of equal or greater value in return. Both parties involved in the exchange (the donor and the recipient) must be living at the time the gift is given for the tax to apply, in most cases. The donor usually pays the tax, though there are circumstances where the recipient can arrange to pay it instead. Where gift tax rules do apply, a person may be allowed to give cash or other items valued up to a certain amount (e.g., $13,000 US Dollars (USD) in the US as of 2011) before being liable for the tax. There are also some gifts that aren't considered taxable in some countries.
Taxable Items
Which gifts are taxable varies depending on the jurisdiction, but most of the time, it only applies to gifts that have a significant value. This could include items like a new car, antique furniture, a house, or even cash. Items like stock or rental property, which may bring income to the recipient, are also included.
If the recipient pays the donor less than the fair market value of the item, it may also be considered a gift and subject to the gift tax. What the donor considers fair and what a government revenue agency defines as an item's value may differ, however. Before gifting anything of value to another person, the donor should have the item appraised and keep careful records of what it is worth.
Taxable Amounts
In the United States, as of 2011, the annual exclusion amount — the yearly total value of gifts that a donor can give to any single recipient — is $13,000 USD. Taxpayers can give gifts below this amount per year without paying a gift tax. Therefore, for example, a donor could give five people $9,000 USD each without being taxed, even though the total — $45,000 USD — is above the annual limit. This amount is subject to change, so people planning to give large gifts should check the appropriate tax law to be up to date on applicable regulations.
Who Pays the Tax
It's a common misconception that the gift recipient is responsible for paying the tax; however, in most cases, it's the donor who pays. If a recipient later sells or gives away the item, taxes may be owed, particularly if the property has been in his or her possession for a few years. In addition, if the item produces income — as may be the case with stock or rental property — then the recipient will need to pay taxes on that income.
A special income tax form may be required to declare any gifts given; in some cases, a donor must file this return even if no actual taxes are owed. Many tax professionals recommend filing a gift tax return in those countries that require one if the gift is anywhere close to the amount that would be taxable. This way, if there is some question about the value, the donor has at least filed the proper paperwork.
Exceptions
Quite often, a government will allow both a husband and wife to give the same person a gift without either party being required to pay tax on it; however, this typically only applies to cases where the gift amount given by each spouse was below the set dollar point. In addition, in most cases, a husband or wife may give his or her spouse gifts worth any amount without paying any tax at all. This is not the case between children and parents.
In many countries, including the US, tuition payments or medical expenses that are paid on someone else's behalf are not subject to a gift tax. Donations to political organizations are also excluded in many cases. When giving a gift to charity, the giver may not only be exempt from paying a gift tax, but may also be able to take a tax deduction. (This is typically the only type of gift that is tax deductible.)
Ways to Avoid the Tax
Some jurisdictions have a lifetime gift tax exemption, which means that no taxes are owed on any gifts until the total of this exemption is met. In other words, if the lifetime exemption is $5 million USD, then no actual taxes will be owed until a person has given away cash or property worth that amount. This does not necessarily mean that a gift tax return is not required, however; in the US, a return is required whenever donations to an individual are above the yearly limit, even if it's well below the lifetime exemption.
It may also be possible to avoid gift taxes by creating a trust instead, in which assets are held for the benefit of a third party. This may lower the amount of taxes owed by the person setting up the trust, known as the trustor. The amount owed when transferring large amounts of money or property varies, however, so donors or trustors should consult with a knowledgeable tax attorney, financial planner, or accountant first, especially if the gift is sizable.
