Gift Tax

Gift Tax, in United States tax law, a federal tax levied since 1932 on transfers and conveyances of property by gift. As defined in the Internal Revenue Code, the tax applies whether the property transferred is real or personal; whether the gift is direct or indirect; and whether the transfer is in trust or otherwise. Thus a transfer subject to the gift tax may be effected by a declaration of trust, the forgiveness of a debt, the assignment of a judgment, the assignment of the benefits of a contract of insurance, or the transfer of cash or securities. The gift tax applies to all property, including federal, state, or municipal bonds that are exempted from other taxes. In the case of citizens or residents of the United States, the tax applies to any property transferred by gift, no matter where the property may be. Gifts to charitable organizations, schools, churches, government bodies, and certain other organizations are exempt.

Payment of the tax is the responsibility of the donor, who must file a gift-tax return with the Internal Revenue Service (IRS). The gift-tax law was designed to prevent people from evading estate taxes, while encouraging lifetime gifts.

The Economic Recovery Tax Act of 1981 changed many of the provisions of earlier gift-tax legislation. This law eliminated the marital deduction. Beginning in 1982, a taxpayer was able to make unlimited tax-free gifts to a spouse. The Economic Growth and Tax Relief Reconciliation Act of 2001 made even more changes to gift taxes. Under this law, beginning in 2002 a donor may give to any number of donees gifts of up to $11,000 each per year. In addition, this law raised the lifetime gift exemption credit from $675,000 to $1 million. The gift exemption credit is the amount of assets a person may transfer tax free during their lifetime. The law also gradually lowered the yearly tax rate on gifts that exceed $11,000 to a single donee. For gifts greater than $11,000 per donee, the tax rate was to decline from 50 percent in 2002 to 35 percent—equal to the top tax bracket—in 2010. However, unless extended by Congress, the Tax Relief Reconciliation Act was due to expire on January 1, 2011. Gift tax provisions in 2011 were to revert to the provisions that applied in 2001, when the gift exemption credit was $675,000 and the maximum annual tax-free gift to a single donee was $10,000.