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What Is The Gift Tax?
What is the gift tax and how do you know whether you are subject to it? The gift tax is often misunderstood. The idea behind the gift tax is to prevent taxpayers from attempting to avoid the federal estate tax by giving money and assets away before they actually die. That said; however, citizens are still allowed to give away up to a certain amount each year without incurring the gift tax. The annual exclusion amount is $13,000.
That means that you are able to give away up to $13,000 to any number of people that you want each year without incurring any form of gift tax. The recipient of the gift does not have a gift tax imposed. Couples may also give away up to a total of $24,000 per year to any number of individuals that they wish.
In addition, you are also allowed to give away up to a total of $1 million over that annual limit in total over your lifetime without incurring the gift tax. So, in theory, you would be able to give away $13,000 to a thousand different people and give away $13 million per year and never have to worry about the gift tax form. On the other hand, if you were to bequest $13 million in your will that would result in an extremely large tax bill via the estate tax.
The average person will not usually have to worry about the gift tax. For the purpose of the gift tax, a gift is defined as any property that is transferred for less than its full value. To make it a bit simpler, this means that you are not paid back for the gift. There are some items that are not considered to be taxable gifts. These include charitable gifts, gifts that are made to a spouse as long as the spouse is a U.S. citizen.
There is an annual limit for spouses that are not U.S. citizens. For 2008, the annual limit for foreign spouses was $133,000. Also, gifts that are made for educational expenses do not count as gifts for the purposes of the gift tax. The payment must be made directly to the institution; however and it may be made for tuition only. Books, supplies and living expenses do not count in the exclusion from the gift tax. It is important to keep in mind that even gifts to minors may trigger the gift tax, as the tax is paid by the person making the gift and not the recipient.
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