The gift tax applies to the transfer by gift of any property. You
make a gift if you give property (including money), or the use of or
income from property, without expecting to receive something of at
least equal value in return. If you sell something at less than its
full value or if you make an interest-free or reduced interest loan,
you may be making a gift.
The general rule is that any gift is a taxable gift. However, there
are many exceptions to this rule.
Generally, the following gifts are not taxable gifts:
- The first $10,000 you give someone during a calendar year
(the annual exclusion),
- Tuition or medical expenses you pay for someone (the
educational and medical exclusions),
- Gifts to your spouse,
- Gifts to a political organization for its use, and
- Gifts to charities.
A separate $10,000 annual exclusion applies to each person to whom
you make a gift. Therefore, you generally can give up to $10,000 each
to any number of people each year and none of the gifts will be
If you are married, both you and your spouse can separately give up
to $10,000 to the same person each year without making a taxable gift.
If one of you gives more than $10,000 to a person during a year, see
Gift Splitting, later.
After 1998, the $10,000 annual exclusion may be increased due to a
cost-of-living adjustment. See the instructions for Form 709 for the
amount of the annual exclusion for the year you make the gift.
You give your niece a cash gift of $8,000. It is your only gift to
her this year. The gift is not a taxable gift because it is not more
than the $10,000 annual exclusion.
You pay the $11,000 college tuition of your friend. Because the
payment qualifies for the educational exclusion, the gift is not a
In 1998, you give $25,000 to your 25-year-old daughter. The first
$10,000 of your gift is not subject to the gift tax because of the
$10,000 annual exclusion. The remaining $15,000 is a taxable gift. As
explained later under Applying the Unified Credit to Gift Tax,
you may not have to pay the gift tax on the remaining $15,000.
However, you do have to file a gift tax return.
Get Form 709 and its instructions for more information about
If you or your spouse make a gift to a third party, the gift can be
considered as made one-half by you and one-half by your spouse. This
is known as gift splitting. Both of you must consent (agree) to split
the gift. If you do, you each can take the $10,000 annual exclusion
for your part of the gift.
Gift splitting allows married couples to give up to $20,000 to a
person annually without making a taxable gift.
If you split a gift you made, you must file a gift tax return to
show that you both agree to use gift splitting. You must file a return
even if half of the split gift is less than $10,000. If the only
reason you must file a gift tax return is because you and your spouse
are splitting a gift, you may use Form 709-A. See the form
instructions for who can use that form. This form is shorter and
simpler than Form 709.
Harold and his wife, Helen, agree to split the gifts that they made
during 1998. Harold gives his nephew, George, $17,000, and Helen gives
her niece, Gina, $12,000. Although each gift is more than $10,000, by
gift splitting they can make these gifts without making a taxable
Harold's gift to George is treated as one-half ($8,500) from Harold
and one-half ($8,500) from Helen. Helen's gift to Gina is also treated
as one-half ($6,000) from Helen and one-half ($6,000) from Harold. In
each case, because one-half of the split gift is not more than the
$10,000 annual exclusion, it is not a taxable gift. However, each of
them must file a gift tax return.
Applying the Unified Credit to Gift Tax
After you determine which of your gifts are taxable, you figure the
amount of gift tax on the total taxable gifts and apply your unified
credit for the year.
In 1998, you give your niece, Mary, a cash gift of $8,000. It is
your only gift to her this year. You pay the $11,000 college tuition
of your friend, David. You give your 25-year-old daughter, Lisa,
$25,000. You also give your 27-year-old son, Ken, $25,000. Before
1998, you had never given a taxable gift. You apply the exceptions to
the gift tax and the unified credit as follows:
- Apply the educational exclusion. Payment of tuition expenses
is not subject to the gift tax. Therefore, the gift to David is not a
- Apply the $10,000 annual exclusion. The first $10,000 you
give someone during a year is not a taxable gift. Therefore, your
$8,000 gift to Mary, the first $10,000 of your gift to Lisa, and the
first $10,000 of your gift to Ken are not taxable gifts.
- Apply the unified credit. The gift tax on $30,000 ($15,000
remaining from your gift to Lisa plus $15,000 remaining from your gift
to Ken) is $6,000. You subtract the $6,000 from your unified credit of
$202,050 for 1998. The amount of unified credit that you can use
against the gift tax in a later year is reduced by $6,000.
You do not have to pay any gift tax this year. However, you do
have to file Form 709.
Filing a Gift Tax Return
Generally, you must file a gift tax return on Form 709 if:
- You gave more than $10,000 (annual exclusion) during the
year to someone (other than your spouse),
- You and your spouse are splitting a gift (you may be able to
use Form 709-A),
- You gave someone (other than your spouse) a gift that he or
she cannot actually possess, enjoy, or receive income from until
sometime in the future, or
- You gave your spouse an interest in property that will be
ended by some future event.
You do not have to file a gift tax return to report gifts to
(or for the use of) political organizations and gifts made by paying
someone's tuition or medical expenses.
You also do not need to report deductible gifts made to charities
- Your entire interest in property, if no other interest has
been transferred for less than adequate consideration or for other
than a charitable use, or
- A qualified conservation contribution that is a restriction
(granted forever) on the use of real property.
If you need to file a gift tax return, you should get Form 709 and
its instructions or Form 709-A.