My favorite benefit I would like to introduce is the gift tax rule. The gift tax is a type of federal tax to be paid to the government while transferring money or property from one person to another without any profits or less than the total value of the gift encountered (“Gift Tax”). The gift tax is paid only if the gift’s price per recipient exceeds $15,000 per year or $11.7 million during the lifetime. Starting with 2022, this amount has changed to $16,000 and $12.06 million, respectively. Only the donor pays this type of tax, and the receiver does not usually pay any taxes unless the gift brings any revenue to the receiver in the future or there is a special arrangement between the donor and the receiver. The gift may come in the form of any real estate property or money and is considered a gift only if the donor receives no full value of the gift in return.
The main purpose of introducing the gift tax was to prevent people from transferring property or large sums of money without paying income taxes. The mechanism of the gift tax function is quite interesting. While there is an annual threshold of the gift price per recipient, $16,000 for 2022, in case the donor exceeds this amount, they can fill the report on the gift tax return form without actually paying it. Instead, the remaining value of the gift will be calculated towards the lifetime exclusion limit, which is $12.06 for 2022. For example, if the donor gives $20,000 to the receiver, they have to report to the Internal Revenue Service by filling out the gift tax return form without paying an actual tax, and the remaining $4,000 from the annual threshold will be subtracted from the lifetime exclusion limit. The gift tax ranges between 18% and 40%, depending on the value of the gift (“Gift Tax”). A gift tax return form should be filled out no later than the 15th of April of the year after the gift was donated. As the gift tax is applicable per recipient, the donor can give several people up to $16,000 without filling out the gift tax return form. The lifetime and annual exclusion limits are adapted according to the level of inflation, therefore, modified annually.
Nevertheless, there are some exceptions when there is no need to fill out the gift tax return form or pay any gift tax. Firstly, if a donee is a donor’s spouse, the donor does not bear any gift tax if the spouse is a U.S. citizen. Secondly, medical expenses and tuition fees are not considered gifts. Therefore, the donor is not imposed with the gift tax. Finally, any money transfers to political organizations and charities are not counted as gifts and do not have to be paid the gift tax.
In conclusion, the gift tax is a tax that is not considered to be troublesome and problematic due to the lifetime exclusion as well as the abovementioned exceptions. Because of the convenient calculation system, the total number of people who pay this type of tax is quite low. The functioning system of the gift tax is already simplified and does not require a lot of paperwork, which makes the process of giving gifts even more enjoyable.
“Gift Tax.” Internal Revenue Service | An Official Website of the United States Government, 2022.