Annual Gift Tax

An annual gift tax is a tax that is applied to the transfer of any property as a gift. If you give property or money, or the income or use of property, to someone without expecting something of the same or greater value in return for it, then you are said to be making a gift. The same is said to be true if you are selling something for less than its full value, or if you make a reduced interest or interest free loan.

A rule of thumb is that any gift that is made is a taxable gift. There are some exceptions to this rule. The rules that are not taxable are gifts to your spouse, medical expenses or tuition that you pay for someone, gifts to qualified charities, and gifts to a political organization.

An annual gift tax exclusion applies to everyone that you make a gift towards. In 2007, the annual exclusion was $12,000. This means that you can give up to $12,000 in gifts to any number of people that you choose and none of those gifts will carry an annual gift tax. Married couples can each give gifts up to $12,000 each to the same person if they want to without having to incur a gift tax.

The IRS states that if you give any property or money to someone during your lifetime, you are subject to the federal gift tax. Even after your death, any money and property you own, which is then referred to as your estate, can be subject to a federal estate tax.

Most estates are not included under the gift tax. The only time you really need to file a return is when you give someone who isn't your spouse a piece of real estate property or money that is worth more than the annual exclusion of $12,000 that you are allowed for one year. While a return is sometimes required, the actual tax will not become payable until the lifetime taxable income cumulates and exceeds the applicable exclusion amount. It is the donor of the gift that is primarily responsible for the payment of the gift tax.

Giving someone you know or a charity organisation you support gifts in the form of property or money is a good way to reduce the chances of having to pay an estate tax later on in your life. So giving back to your family, children and the community actually offers you a number of tax benefits.