The gift must be of a “current interest” in the property, which means an unrestricted right to immediately use or enjoy the property (or income from the property). 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.
The assets you receive as a gift or inheritance are not usually taxable income at the federal level. However, if the assets later produce income (they may earn interest or dividends, or you collect rent), that income is likely taxable. IRS Publication 525 contains the details. In addition, some states have inheritance taxes.
The beneficiary will only pay gift tax in special circumstances in which he has decided to pay it by agreement with the donor. Finally, people who make donations as part of their overall estate and financial plan often engage the services of lawyers and CPA, EA and other professionals. Making a gift or leaving your estate to your heirs usually doesn't affect your federal income tax. However, a special rule allows you to make a global contribution and distribute it over five years for gift tax purposes.
Although no tax is due in this situation, the first spouse must file a gift tax return stating that the second spouse has agreed to split the gift. Once the annual exclusion and tax-free medical and educational donations are exhausted, you can make additional tax-free donations using the wealth tax exemption and lifetime gifts. However, you won't have to pay any taxes until you've reached the lifetime gift tax exemption. This is because both the present value and any possible future growth of the donated assets are removed from your taxable equity.
If you want to calculate taxable income from gifts that exceed the annual exclusion limit, the following table breaks down the rate you will have to pay based on the value of the gift. There are some in Congress and the IRS who want to “recover taxes on gifts made with the highest exemption amount if the exemption is lower when the estate is processed. Donations can be made on behalf of anyone, regardless of their relationship to you, and for any level of education. These include structuring gifts to qualify for valuation discounts and using different types of trusts, such as grantor annuity trusts.
Finally, it's important to note that charitable gifts are not only exempt from gift tax, but may also be eligible as an itemized deduction on your individual income tax return. The IRS allows a lifetime tax exemption for gifts and inheritances, up to a certain limit, which is adjusted annually to keep pace with inflation. So you don't have to worry about paying the gift tax on, say, a sweater you bought for your nephew for Christmas. If you're not sure if gift tax or estate tax applies to your situation, see Publication 559, Survivors, Executors, and Administrators.
