The Reason Behind Gift Taxes

• Gift taxes were put into place to prevent people from avoiding the federal estate tax by giving away all their money before they die. The definition of a gift is something that is given away without any payment or without repayment in full. The giver of the gift pays the gift tax, not the recipient. Many people never experience the gift tax because the limits are fairly high and there are several exemptions to the law.
  
  

Gift Tax Limits

• The limit on a gift given to children or anyone else is $13,000 per person per year as of publication. Anything below this amount is not taxable. A person can give as many people as he wants $13,000 per year without being taxed. There are lifetime limits of gifts, however. The lifetime limit was raised from $1 million to $5 million in 2011. The rule applies to each individual, so parents, for example, could each give $13,000 a year to a child, which raises the limit to $26,000 per year per child if both parents are givers.
  
  

Gift Exemptions

• There are many exemptions to the gift tax. One of the biggest examples is education. Parents are not hit with a gift tax for paying for their children's education. However, the money must go directly to the educational institution instead of being filtered through the child. If parents want to help with the costs of books and living expenses, that amount is subject to the gift tax if it exceeds $13,000 per year. Gifts for medical expenses are also not taxable if the money is paid directly to the medical institutution. The same goes for charitable donations.
  
  

Gifts Subject to Gift Tax

• Gifts that are subject to the gift tax include standard gifts such as checks or cash. Additionally, if a parent adds a child to a real estate note and the child has the right to sever joint tenancy and receive half of the property, then the gift tax is applicable. Loaning more than $10,000 at less than the market rate of interest also is subject to the gift tax; the tax would be calculated based on the difference between the market interest rate and the interest rate given to the borrower. Canceling indebtedness as well as making a payment on behalf of somebody else also qualifies the giver to be subject to gift tax.