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How Gift Tax Works

        Money | Taxes

You might want to persuade grandpa to part with some of his riches now rather after he is gone, but don’t forget about the gift tax.
You might want to persuade grandpa to part with some of his riches now rather after he is gone, but don’t forget about the gift tax.
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Whoever said it's better to give than to receive must have never read the U.S. tax code. With big gifts come great tax responsibility. The so-called gift tax is the federal government's way of taxing a piece of certain property that changes hands without the giver receiving something of similar value in return from the receiver. A surcharge of up to 40 percent is generally imposed on the person who transfers the property -- including money -- regardless of whether the gesture is actually meant as a gift [sources: Cordes, Nolo].

It works like this: a person who dies with a substantial amount of property and money -- an estate -- is subject to an estate tax. That means some of that wealth will go to Uncle Sam, rather than the former estate holder's family, friends or mistress. In order to avoid the penalty, some folks look to spread their wealth around while they're still alive. These property transfers are subject to the gift tax.

The amount of the gift tax is based on the property's fair market value. For cash, that value is pretty easy to understand. Other items, however, are valued by what an ordinary buyer would pay for them. "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts," according to the tax code.


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