The gift tax applies to transfers by gift of 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. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift. In 2010, any transfer of money or property in trust is a taxable gift unless the trust is treated as wholly owned by the donor or the donor's spouse.
The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule.
Generally, the following gifts are not taxable gifts:
- Gifts, excluding gifts of future interests, that are not more than the annual exclusion for the calendar year,
- Tuition or medical expenses you pay directly to a medical or educational institution for someone,
- Gifts to your spouse,
- Gifts to a political organization for its use, and
- Gifts to charities.
A separate annual exclusion applies to each person to whom you make a gift. The gift tax annual exclusion is subject to cost-of-living increases.
| Gift Tax Annual Exclusion |
| Year(s) || Annual Exclusion |
|1998 – 2001||$10,000|
|2002 – 2005||$11,000|
|2006 – 2008||$12,000|
For 2009, you generally can give a gift valued at up to $13,000 each, to any number of people, and none of the gifts will be taxable.
However, gifts of future interests cannot be excluded under an annual exclusion provision. A gift of a future interest is a gift that is limited so that its use, possession, or enjoyment will begin at some point in the future.
If you are married, both you and your spouse can separately give gifts valued at up to $13,000 to the same person in 2009 without making a taxable gift. If one of you gives more than the $13,000 exclusion to a person in 2009, see Gift Splitting, later.taxmap/pubs/p950-001.htm#en_us_publink100099453
In 2009, you give your niece a cash gift of $8,000. It is your only gift to her this year. The gift is not a taxable gift because it is not more than the $13,000 annual exclusion.taxmap/pubs/p950-001.htm#en_us_publink100099454
You pay the $15,000 college tuition of your friend directly to his college. Because the payment qualifies for the educational exclusion, the gift is not a taxable gift.taxmap/pubs/p950-001.htm#en_us_publink100099455
In 2009, you give $25,000 to your 25-year-old daughter. The first $13,000 of your gift is not subject to the gift tax because of the annual exclusion. The remaining $12,000 is a taxable gift. As explained later under Applying the Unified Credit to Gift Tax, you may not have to pay the gift tax on the remaining $12,000. However, you do have to file a gift tax return.taxmap/pubs/p950-001.htm#en_us_publink100099456
See Form 709 and its instructions for more information about taxable gifts. taxmap/pubs/p950-001.htm#en_us_publink100099457
If you or your spouse makes a gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both of you must consent (agree) to split the gift. If you do, you each can take the annual exclusion for your part of the gift.
In 2009, gift splitting allows married couples to give up to $26,000 to a person without making a taxable gift.
If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion. taxmap/pubs/p950-001.htm#en_us_publink100099458
Harold and his wife, Helen, agree to split the gifts that they made during 2009. Harold gives his nephew, George, $21,000, and Helen gives her niece, Gina, $18,000. Although each gift is more than the annual exclusion ($13,000), by gift splitting they can make these gifts without making a taxable gift.
Harold's gift to George is treated as one-half ($10,500) from Harold and one-half ($10,500) from Helen. Helen's gift to Gina is also treated as one-half ($9,000) from Helen and one-half ($9,000) from Harold. In each case, because one-half of the split gift is not more than the annual exclusion, it is not a taxable gift. However, each of them must file a gift tax return.taxmap/pubs/p950-001.htm#en_us_publink100099459
After you determine which of your gifts are taxable, you figure the amount of gift tax on the total taxable gifts and apply your unified credit for the year. taxmap/pubs/p950-001.htm#en_us_publink100099460
In 2009, you give your niece, Mary, a cash gift of $8,000. It is your only gift to her this year. You pay the $15,000 college tuition of your friend, David. You give your 25-year-old daughter, Lisa, $25,000. You also give your 27-year-old son, Ken, $25,000. Before 2009, you had never given a taxable gift. You apply the exceptions to the gift tax and the unified credit as follows:
- Apply the educational exclusion. Payment of tuition expenses is not subject to the gift tax. Therefore, the gift to David is not a taxable gift.
- Apply the annual exclusion. The first $13,000 you give someone in 2009 is not a taxable gift. Therefore, your $8,000 gift to Mary, the first $13,000 of your gift to Lisa, and the first $13,000 of your gift to Ken are not taxable gifts.
- Apply the unified credit. The gift tax on $24,000 ($12,000 remaining from your gift to Lisa plus $12,000 remaining from your gift to Ken) is $4,680. For more information, see the Table for Computing Gift Tax in the Instructions for Form 709. You subtract the $4,680 from your unified credit of $345,800 for 2009. The unified credit that you can use against the gift tax in a later year is $341,120.
You do not have to pay any gift tax for 2009. However, you do have to file Form 709.
Generally, you must file a gift tax return on Form 709 if any of the following apply.
- You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
- You and your spouse are splitting a gift.
- You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.
- You gave your spouse an interest in property that will be ended by some future event.
You do not have to file a gift tax return to report gifts to (or for the use of) political organizations and gifts made by paying someone's tuition or medical expenses.
You also do not need to report the following deductible gifts made to charities:
- Your entire interest in property, if no other interest has been transferred for less than adequate consideration or for other than a charitable use or
- A qualified conservation contribution that is a perpetual restriction on the use of real property.
If you need to file a gift tax return, you should see Form 709 and its instructions.