According to the Internal Revenue Service (IRS), a gift is property given to an individual by another individual who receives less than the property's value in return. Money, real estate or other items of value can be a gift. The sale of an item for less than its fair market value or a low or no-interest loan is also considered a gift. Gift tax is the tax the IRS attaches to gifts. The IRS allows gifts under a set amount with no tax consequence. The relationship between gift giver and recipient is irrelevant to the taxation of the gift.
As of 2009, the IRS allows you to give a gift valued up to £8,450 to an individual before gift tax is imposed. The IRS increases this limit on a regular basis. A married couple can give a gift valued up to £16,900 before there are tax consequences as each spouse is entitled to their own gift tax exclusion.
The tax exclusion is per individual receiving the gift. Therefore, an individual with three children could gift each child £8,450 a year with no gift tax. A married couple could gift each of the three children £16,900 a year with no tax consequences.
The gift giver is responsible for paying tax on gifts above the excluded amount. The annual gift tax is figured on an annual, calendar year basis and is reported to the IRS by April 15 of the following year. Gift tax is computed and reported on IRS Form 709. Spouses must each file a Form 709 if gifts were made using both individual's exclusion, these forms cannot be filed jointly.
Gift recipients are able to receive any sized gifts with no gift tax consequence; although they may volunteer to pay any taxes due. If the gift giver does not pay the gift tax, the IRS may seek payment from the recipient.
Tuition payments for an individual made to a qualifying educational entity is not considered a gift. Payment must be made directly to an organisation that has a faculty, curriculum and enrolled students to qualify for this exception.
Expenses paid for another's medical care are not considered gifts. To qualify as an exception, payment must be made directly to the medical provider and must be for the diagnosis, treatment, cure or prevention of disease.
Other exceptions to gift tax include transfers of property to a spouse, political parties or charities.