Gift Tax
What does "Gift Tax" mean in law?
The federal gift tax, codified under IRC Sections 2501-2524, is imposed on the donor upon the transfer of property by gift during the donor's lifetime. The gift tax operates as a backstop to the estate tax, preventing taxpayers from avoiding transfer taxes by giving away property before death. Each donor may exclude a specified annual amount per donee (currently $18,000, indexed for inflation) under Section 2503(b), and transfers exceeding the annual exclusion consume the donor's unified credit, which is shared with the estate tax exemption. Certain transfers are wholly exempt, including payments of tuition or medical expenses made directly to educational or medical institutions under Section 2503(e), and unlimited transfers to a U.S. citizen spouse under the marital deduction of Section 2523.
Definition
The federal gift tax, codified under IRC Sections 2501-2524, is imposed on the donor upon the transfer of property by gift during the donor's lifetime. The gift tax operates as a backstop to the estate tax, preventing taxpayers from avoiding transfer taxes by giving away property before death. Each donor may exclude a specified annual amount per donee (currently $18,000, indexed for inflation) under Section 2503(b), and transfers exceeding the annual exclusion consume the donor's unified credit, which is shared with the estate tax exemption. Certain transfers are wholly exempt, including payments of tuition or medical expenses made directly to educational or medical institutions under Section 2503(e), and unlimited transfers to a U.S. citizen spouse under the marital deduction of Section 2523.
Example
A parent who gives $50,000 to a child in a single year uses the $18,000 annual exclusion and must file a gift tax return for the remaining $32,000, which reduces the parent's lifetime unified credit rather than triggering immediate tax.