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My understanding is that at a certain point, there are taxes or regulations or something on gifts. Like if I were going to give my friend $500,000, for whatever reason this isn't as straightforward as giving him $50.

What should I know about this?

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Are you still enrolling new friends? =) –  JohnFx Jan 26 '13 at 16:21

2 Answers 2

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This depends on the country(ies) involved.

US citizen/resident giving gifts is required to pay a gift tax. The recipient of the gift, however, pays nothing. The value of the gift at the time of the gift-giving is used to determine the tax, and an exclusion of $14000 per person per year (as of 2013) is available to allow smaller gifts to be given without too much of a red tape. There's also a lifetime exemption which is shared between the gift tax and the estate tax. This exemption is $5.25M in 2013.

The reason the gift tax exists in the US is because the US tax code is very aggressive. This is basically double taxation, similarly to estate tax. Gifts/estates are after-tax money, i.e.: income tax has been paid on them, yet the government taxes them again. Why? The excuse is to disallow shifting of income: if one person has high income tax brackets, he may give some of his income-producing property to another person with lesser brackets who would then pay less income taxes (for example, parents would transfer property to children). Similarly capital gains could be shifted. Generation-skipping tax is yet another complication to disallow people use gifts to avoid estate taxes: a grandparent would gift stuff to grandchildren, thus skipping a level of estate taxes (the parents in between).

In other countries the tax codes may be less aggressive, and not tax gifts/inheritance as this money has been taxed before. This is a more fair situation, IMHO, yet it means that wealth moves from generation to generation without the "general public" benefiting from it.

So if you're a US person and considering giving or receiving a gift - you need to consult with a tax adviser about the consequences. Similarly with other countries, if you are subject to their tax laws.

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+1 - I edited in the 2 number for 2013. Your answer was detailed enough I'd not have much else to say. –  JoeTaxpayer Jan 25 '13 at 2:48
@joe thanks, the tax class I took in the community college last year starts to fade away:) –  littleadv Jan 25 '13 at 2:59
A minor addition: a gift tax return (Form 709) must be filed if a gift of more than $14,000 (for 2013) is made to one or more individuals. Only the gifts exceeding $14K are subject to gift tax. However, payment of gift tax can be avoided if one is willing to reduce one's lifetime unified gift and estate tax exemption. For most people, the reduction is inconsequential (see, for example, this answer to a related question) but a $500K is a serious chunk of money, and Congress could reduce the exemption to the previous $1M at any time. –  Dilip Sarwate Jan 25 '13 at 3:44
Hey! Thanks to explaining why. I never knew the purpose of gift or inheritance taxation. –  MrChrister Jan 25 '13 at 5:19
In some countries where there is no gift tax but there is an estate tax (sometimes called death duties), gifts given within a few years (often three years) of death are nonetheless included in the estate of the deceased for the purposes of estate tax assessment. Such gifts are referred to as having been given in anticipation of death, so that giving away all of one's property on one's "deathbed" does not shield the property from the estate taxman. –  Dilip Sarwate Jan 25 '13 at 17:52

This forum is not intended to be a discussion group, but I would like to add a different perspective, especially for @MrChrister, on @littleadv's rhetorical question

"... estates are after-tax money, i.e.: income tax has been paid on them, yet the government taxes them again. Why?"

For the cash in an estate, yes, that is after-tax money, but consider other assets such as stocks and real estate. Suppose a rich man bought stock in a small computer start-up company at $10 a share about 35 years ago, and that stock is now worth $500 a share. The man dies and his will bequeaths the shares to his son. According to US tax law, the son's basis in the shares is $500 per share, that is, if the son sells the shares, his capital gains are computed as if he had purchased the shares for $500 each. The son pays no taxes on the inheritance he receives. The deceased father's last income tax return (filed by the executor of the father's will) does not list the $490/share gain as a capital gain since the father did not sell the stock (the gain is what is called an unrealized gain), and so there is no income tax due from the father on the $490/share. Now, if there is no estate tax whatsoever, the father's estate tax return pays no tax on that gain of $490 per share either. Would this be considered an equitable system? Should the government not tax the gain at all?

It is worth noting that it would be possible for a government to eliminate estate taxes entirely, but instead have tax laws that say that unrealized gains on the deceased's property would be taxed (as capital gains) on the deceased's final tax return.

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This is a mistake with the inheritance tax and it is the inheritance tax that needs fixing (perhaps abolish it and instead solely rely on gift tax with additional allowances for kins?). Trying to fix a mistake using a new mistake (double-taxation) instead really fixes nothing and now we have two things that need fixing. –  Pacerier May 14 '13 at 14:52
The son's basis is the FMV at the time of death because of the estate tax. But the estate tax is on the whole amount, not just gains. So while you explain why there's tax, it doesn't justify the double taxation. Moreover, estate tax rates are much higher than income tax rates (35% flat above the exemption as opposed to the 15%-20% capital gains tax). –  littleadv May 29 '13 at 19:52

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