Transferring cash or property to another person with no consideration, or consideration less than full fair market value, has income and gift tax implications. For income tax purposes, the donee (recipient) does not recognize any income on the receipt of the gift (Code §102). For federal gift tax purposes, the donor is responsible for the tax if it applies, whether or not the donor intended the transfer to be a gift (Reg. §25.2511-1(h)(5)). Here are some guidelines on how to treat gratuitous transfers for federal tax purposes.

Overview of Federal Gift Tax Rules

Gifts that are excludable from gross income for income tax purposes may be subject to gift tax rules. Briefly, these rules provide:

  • There is an annual gift tax exclusion for gifts of present interests in property (i.e., cash gifts). The annual gift tax exclusion is $15,000 per donee in 2021, with no limit on the number of donees. The annual gift tax exclusion may be adjusted annually for inflation.
  • Each person has a lifetime exemption amount. To the extent it is not used for lifetime gifts, it applies to the federal estate tax. For 2021, the lifetime exemption amount is $11.7 million. It may be adjusted annually for inflation through 2025, at which time it is set to revert to a significantly lower amount.
  • Married couples may agree to “split gifts,” effectively doubling the gift tax exclusion and the lifetime exemption amount.
  • Gifts to spouses are fully tax free due to the marital deduction (Code §2523). However, there is a limit for gifts to non-U.S. citizen spouses. For 2021, the limit is $159,000.
  • Gifts to an IRS-recognized charity are fully gift tax free (Code §2522).
  • Payments of medical or education expenses made directly to providers (e.g., schools) are fully tax free (Code §2503(e)).

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