What gifts are excluded from the gift tax?

However, while gifts to your spouse are exempt, gifts to your children, grandchildren, other family members or friends are not. The only exception to this rule is medical expenses and tuition. You can pay someone else's medical bills or school tuition without any limit and without incurring a gift tax. Although beneficiaries do not face immediate tax consequences, they may face capital gains tax if they sell gifted properties in the future.

A Crummey power of attorney allows the beneficiary of a trust to withdraw a donation from a trust within a specified period after the gift has been made. Some common examples of gifts with future interest are reserving a lifetime property in real estate or financing a trust. Go further up and you'll need to fill out a gift tax form when you file returns, but you could still avoid having to pay any gift tax. You must attach supporting documents that support the valuation of the gift, such as financial statements in the case of a donation of shares in a closed-end corporation or real estate appraisals.

This rule states that you can give everything you own to your spouse, whether during his or her life or death, without incurring gift or inheritance taxes on the value of that property. 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. 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. Assuming you haven't used your entire lifetime exemption yet, you won't have to pay any gift tax to grandchildren.

This donation may be in addition to, for example, tuition paid directly to the school or university of a grandchild who is exempt from gift tax. On a gift tax return, you report the fair market value of the gift on the date of the transfer, your tax base (as a donor), and the identity of the recipient. The beneficiary will only pay gift tax in special circumstances in which he has decided to pay it by agreement with the donor. However, you must inform the IRS that those donations exceeded the annual limit by filing a gift tax return.

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). These include structuring gifts to qualify for valuation discounts and using different types of trusts, such as grantor annuity trusts. So you don't have to worry about paying the gift tax on, say, a sweater you bought for your nephew for Christmas.