Legal Definitions - federal gift tax

The federal gift tax is a tax imposed by the U.S. federal government on individuals who transfer money or property to another person without receiving something of equal value in return. This tax applies to the person making the gift (the donor), not the recipient (the donee). It is typically triggered only when the value of the gift to a single individual in a given year exceeds a specific amount set by law, known as the annual gift tax exclusion. Gifts below this annual exclusion limit are generally not subject to the tax and do not need to be reported to the IRS.

• Example 1: A Grandparent's Generous Contribution

  A grandmother decides to help her grandson purchase his first home by gifting him $100,000 towards the down payment. She receives nothing in return for this money.

  Explanation: In this scenario, the grandmother is the donor, and her grandson is the donee. Since the $100,000 gift significantly exceeds the annual gift tax exclusion amount, the grandmother would be responsible for reporting this gift to the IRS and potentially paying federal gift tax on the portion of the gift that exceeds the annual exclusion.

• Example 2: Transferring Ownership of a Valuable Asset

  A successful entrepreneur decides to transfer ownership of a valuable antique car, appraised at $250,000, to her niece as a birthday present. The niece pays nothing for the car.

  Explanation: Here, the entrepreneur is the donor, and her niece is the donee. The antique car is property transferred without consideration. Because the car's value is well above the annual gift tax exclusion, the entrepreneur would need to report this gift and may owe federal gift tax on the amount exceeding the exclusion.

• Example 3: Forgiving a Substantial Loan

  A wealthy individual loaned his friend $75,000 several years ago to start a business. The business is now thriving, but the individual decides to forgive the entire outstanding loan balance, telling his friend he no longer needs to repay it.

  Explanation: By forgiving the loan, the wealthy individual has effectively made a gift of $75,000 to his friend. This is considered a transfer of property (the value of the debt) without consideration. Since this amount surpasses the annual gift tax exclusion, the individual who forgave the loan (the donor) would be subject to federal gift tax on the portion exceeding the exclusion.