The gift tax is a tax levied by the federal government on monetary or value gifts. Usually this tax is paid by the person who gives the gift, though agreements can be made for the person who receives the gift to make payment. In such cases, the Internal Revenue Service recommends that individuals seek professional assistancein the matter.
Exemptions exist that cover the majority of gifts people give and receive. Taxes aren’t associated with the money most people put in a grandchild’s birthday card, for example, because the gifts you give someone each year have to total more than the exemption amount, which is $14,000 for 2015.
If you gift someone money to pay for educational or medical expenses, those are exempt from the tax regardless of amount, and gifts to spouses or political organizations are not taxed. Since the exemption total is applied to each person you gift amounts to, you can gift multiple people up to the exemption amount without worrying about federal taxes.
So, what does the gift tax have to do with estate taxes? The ideas of gifting and estates tend to go hand-in-hand, and understanding the gift tax can help individuals provide for heirs without facing large tax burdens. Individuals can gift items to heirs before death, slowly reducing the value of an estate over the years. This passes on value to heirs and lets individuals with large-value estates bring the value down under the federal exemption value for estate taxes. Because gifts over a certain amount are taxed, individuals might want to consider estate structures like trusts if they are gifting larger amounts.
Source: IRS, “Frequently Asked Questions on Gift Taxes,” accessed June 25, 2015