What is Gift Tax? Who Pays It?

What is Gift Tax?Gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not. Gift tax applies to the transfer by gift of any property. You may 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. It is important to note that 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.

Who pays the gift tax? The donor is generally responsible, however the donee may agree to pay the tax instead. If you are considering this arrangement, a tax professional may need to be consulted to ensure payment is properly handled.

When is the gift tax due? Gift tax is paid by the same deadline federal taxes are due - April 15 - following the year in which the gift was made. Therefore, the tax would be paid in 2011 on a gift made in 2010.

What gifts are excluded from gift tax? Generally, any gift is a taxable gift. However, some exceptions do apply: 1) gifts that are not more than the annual exclusion (currently $13,000 per donee) for the calendar year; 2) tuition or medical expenses you pay for someone else (the education/medical exclusion); 3) gifts to your spouse; 4) political donations (certain restrictions apply); and 5) gifts to qualifying charities (certain restrictions apply).

I want to gift my business to my children and family. How can I maximize my tax-free "gifting power"? Being that an individual can gift annually, per donee, only up to $13,000 tax free (in 2010), business owners should rely on a professional business valuation in assessing the proper percentage of ownership interest to gift. An accredited business valuator will value a business applying IRS standards (businesses must be valued at fair market value) and taking various valuation discounts into consideration, thereby maximizing the amount of gift to each donee.