Why do you have to pay tax on a gift?


Quick Answer

The main reason for the institution of the gift tax is to prevent individuals from giving away their estates to a select group of people tax-free, reports Intuit. However, and in keeping with this rationale, small gifts are not taxable. In 2014, only gifts above $14,000 were considered taxable. An individual may still give away a large fortune without having to pay taxes, but he could not give it to a few select relatives without being taxed.

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Why do you have to pay tax on a gift?
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Full Answer

This rationale makes clear why it is the person paying the gift, except under very rare conditions, who is responsible for paying the gift tax, when applicable, as dictated by the Internal Revenue Service. A gift may also be given without paying taxes if such a gift is for the payment of tuition or medical expenses for another individual, reports. Gifts to spouses and to political organizations are also not taxable either.

Gifts to charities are not only nontaxable, but the amount of the gift is deductible up to a limit, explains the IRS. For gifts that are not monetary, IRS regulations dictate that the fair market value of the gift be used as the monetary amount, either when paying taxes or claiming a deduction. The IRS defines "fair market value" as the amount that should have been paid for the gift in a transaction between a willing seller and a willing buyer who are both educated about the transaction under normal circumstances.

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