Gift Tax
What it is:
A gift tax is a federal tax on anything of value that one person gives to another.
How it works/Example:
Let's say Jane Smith gives her son John $25,000 because John is going through a tough time and just lost his job.
Because the money is a gift from Jane to John and is more than the $14,000 federal limit for tax-free gifts from an individual (the threshold is therefore for gifts of money or property owned by more than one person), Jane must pay a gift tax on the portion of the $25,000 gift that exceeds that limit.
Gifts to a spouse or a political organization are usually not subject to the gift tax (they may be taxable, for example, if the spouse is not a U.S. citizen). Additionally, if a person pays college tuition or medical bills directly, the gift tax also does not apply.
Why it matters:
Matters of gift tax require the advice of a good tax advisor, because the gift tax rules are complicated and the threshold changes frequently. The tax liability becomes even more complicated if the receiver of the gift turns around and sells the gift, which often happens when people donate cars, art or real estate to charities.
Many people attempt to reduce the size of their estate while they're still alive by giving away portions of their estate. This can be done without triggering death taxes as long as the gifts are below the gift-tax exemption limit.