Why does someone who gives money have to pay a gift tax?

by Elizabeth W. Kidd, CPA | May 18, 2018

In 2018, a person can gift $15,000 per year per person. The person who receives the money does not have to pay taxes on this money. Why does the giver have to pay a gift tax? In other words, if I choose to give someone money I have earned and paid taxes on, why do I have to pay an additional gift tax on the money I choose to give? It’s the same money that I have already paid federal and state taxes on.

There are no limits on the amount one can give to another person. In each year, however, there is a specified amount can be given without the necessity of reporting the gift. In 2018, that amount is $15,000. Gifts in excess of that amount are reportable, but no gift tax is due unless the total of lifetime gifts exceeds the unified exclusion amount which, in 2018, is $5.6 million.  

Gift taxes are unified with the federal estate tax. Both are transfer taxes, not income taxes. They are unified because, without doing so, estate taxes could be avoided by lifetime gifts.  

There are techniques to minimize gift tax and reporting requirements, such as joint gifts and direct payment of items excludible from the gift tax. 

High-net-worth individuals often use planned giving to decrease both estate tax and income taxes. Consultation with your tax professional can provide you with information for your particular situation.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Elizabeth W. Kidd, CPA, is a retired accounting instructor in Erie, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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