What does the IRS consider as a gift? The answer to that question is rather simple. A gift is basically seen as any transfer of items where that item's monetary worth is not received to the donor in return. To make is even simpler - gifts are items received by the donee that cost them nothing, but costs the donor the lost of ownership.
So, what exactly is a gift tax? A gift tax is a tax on the transfer of property (usually the transfer of cash) by one person to another, while the giver receives nothing in return. The gift tax applies to any transfer of ownership of an item of any types of property. This means that the gift given can include but are not to be limited to: real estate properties, stocks and bonds, and monies. A person generally makes an item a gift when they give the item away to someone without expecting to receive something of equal value from the beneficiary. Another way to give an item as a gift is to sell that item less than its full value.
However, the donor of the gift is responsible for paying the gift tax to the IRS. Sometimes, if there are special arrangements done, then the donee can be the one to pay the tax instead. Yet, in order to do this type of arrangement, it is best to speak with a tax professional to make that type of arrangement beforehand.
Nonetheless, there are some things that cannot be given as a gift. Those exceptions are as following: the gift is to a giver's spouse, the gift is used for tuition or medical expenses, the gift is given to a political organization for its own use, or the gift is more than the annual exclusion for that particular calendar year (As of Jan. 2009 that was $13,000).
However, when one decides to give a gift or leaves their estate to their heirs, it generally does not affect their federal income tax return. As a general rule, the donor cannot deduct the value of their given gifts on their income tax returns. However, what a gift tax can do is help in the reduction of the donor's estate by helping them pay only the capital gains tax. The great advantage to giving gifts is that the donor can lower their tax bill by decreasing their estate size. Therefore, in a roundabout way, gifts, while not helping in lowering income taxes can help lower other taxes in return. So it is still a good idea to give gifts.