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You'll Be Surprised at How the Gift Tax Works -- And How It Might Impact Your Finances

how gift tax works

NEW YORK (MainStreet ) — As if you needed anything else to worry about at tax time, did you know there's a tax on gifts? The gifts you receive are totally free and clear; if you are the receiver you can more or less rest easy. But the gifts you give are subject to one of the most complicated areas of the tax code. And while it's a tax that mostly applies to the well-to-do, the threshold for what constitutes the "well-to-do" might be lower than you think.

The Origins of the Gift Tax

"It dates back to old tax law and philosophy," says Marc J. Minker, the private client services national practice leader with CBIZ, Inc. in New York. "Very few people today remember when we had marginal tax brackets in the 60 to 90% range." He notes that through a lot of political

wrangling, the marginal tax brackets were trimmed back, leaving the IRS with a problem: It needed to find alternative sources of revenue for the Treasury.

That's where the gift tax and estate tax regimes came into play. "They're sort of unified," says Miner. "You either pay the tax while you're alive or after you've passed away." The purpose of the gift and estate tax is to capture money that's not current income but saved assets that spill down from one generation to the next. Initially, Minker notes, there was just an estate tax. However, people very quickly caught on that they could simply transfer their assets while they were still alive to avoid the death tax. "They effectively pauperized themselves to avoid the estate tax," Minker said. Congress got wise to this trick and created the gift tax in 1932.

How the Gift Tax Works.

Category: Taxes

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