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. If you make a gift with a value greater than the annual exclusion, you must file a gift tax return using IRS Form 709, United States Gift Tax Return (and Generation Skip Transfer).
Each year, the amount a person gives to others during the annual exclusion accrues until they reach the lifetime gift tax exclusion. However, you won't have to pay any taxes until you've reached the lifetime gift tax exemption. If you're paying tuition or medical bills, paying directly to the school or hospital can help you avoid the gift tax reporting requirement (see IRS Form 709 instructions for more information). 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.
However, you don't actually have to pay gift tax unless the value of your taxable lifetime gifts has exceeded your lifetime exclusion. And while gifting to family and friends certainly has its benefits, you could face some unintended financial consequences in the process. Form 4506-T has multiple uses and special attention should be paid when completing the form for a gift tax inquiry. This method should be reserved for taxpayers who have no record of which tax year (s) a gift tax return was filed.
The most common time gift taxes are paid is when they are tied to an estate after someone dies, since very large assets can exceed the multi-million dollar limit. The IRS defines a gift as “any transfer to a person, either directly or indirectly, in which full consideration is not received in return. In addition to these gifts that are not taxable, there are some transactions that are not considered gifts and therefore are definitely not taxable gifts. Thanks to annual and lifetime exclusions, most people will never end up paying gift tax and many will not have to file a gift tax return for property they transfer to others.
Making a gift or leaving your estate to your heirs usually doesn't affect your federal income tax. This could apply to parents who give money to their children, to the gift of property such as a house or car, or any other transfer. However, if your daughter was 17 years old, support payments would be considered part of your legal obligation to support her and therefore would not be considered gifts.
