Gift Tax

The gift tax is a federal tax on the transfer of property by gift, imposed on the person who makes the transfer rather than the person who receives it. A tax, computed as provided in section 2502, is hereby imposed for each calendar year on the transfer of property by gift during such calendar year by any individual resident or nonresident (26 U.S.C. 2501(a)(1), 2024 edition). The tax imposed by section 2501 shall be paid by the donor (26 U.S.C. 2502(c), 2024 edition).

What the Chapter Reaches

The scope clause is written to close the obvious escapes, and it does so in one sentence. Subject to the limitations contained in this chapter, the tax imposed by section 2501 shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; but in the case of a nonresident not a citizen of the United States, shall apply to a transfer only if the property is situated within the United States (26 U.S.C. 2511(a), 2024 edition).

Read the whole sentence rather than its first half. The four “whether” pairs describe what the tax reaches for everybody, and the clause after the semicolon narrows it for one class of donor only. The regulation states the wide half plainly, that the tax applies to all transfers by gift of property, wherever situated, by an individual who is a citizen or resident of the United States, to the extent the value of the transfers exceeds the amount of the exclusions authorized by section 2503 and the deductions authorized by the sections it goes on to list (26 CFR 25.2501-1(a)(1)). A nonresident who is not a citizen is reached only on property situated in the United States.

The word “indirect” carries more weight than it looks. A transfer does not have to be called a gift, or documented as one, to be one.

A Sale for Too Little Is a Gift of the Difference

Valuation is fixed at the moment of the transfer. If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift (26 U.S.C. 2512(a), 2024 edition). Later movement in the asset’s value changes nothing about the gift already made.

The next subsection is the one that catches family transactions. Where property is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year (26 U.S.C. 2512(b), 2024 edition). A parent selling a rental property to a child below market value has made a gift of the spread, whether or not anybody used the word. The standard the value column runs on is fair market value, set out in valuation.

The Tax Is Cumulative Across a Lifetime

The computation is not a fresh start each January, and that is the structural fact most descriptions of this tax leave out. The tax imposed by section 2501 for each calendar year shall be an amount equal to the excess of a tentative tax, computed under section 2001(c), on the aggregate sum of the taxable gifts for such calendar year and for each of the preceding calendar periods, over a tentative tax, computed under such section, on the aggregate sum of the taxable gifts for each of the preceding calendar periods (26 U.S.C. 2502(a), 2024 edition).

Both limbs matter. The first runs the rate schedule over everything the donor has ever given; the second runs it over everything given before this year; the tax for the year is the difference. Earlier gifts are not taxed again, but they push the current year’s gifts further up the schedule. A preparer taking on a client mid-life therefore needs the prior gift history, not just the current year’s transfers, and that history is what “preceding calendar period” is defined to collect (26 U.S.C. 2502(b), 2024 edition).

Two other rules sit between a transfer and any tax actually payable, and both have their own homes. The annual per-recipient exclusion, the present interest condition and the gift tax return filing duty are in gift tax exclusion, which also covers the lifetime credit and how it differs from the annual amount.

Which return the transfer lands on turns on the donor’s status, and the IRS sets it out by status. A United States citizen or United States resident files Form 709 (IRS, Gift tax). A nonresident not a United States citizen does not, and instead files Form 709-NA, and the entry that says so carries its own limit, for gifts of real and tangible property situated in the U.S. (IRS, Gift tax). The same table carries one crossover, that a donor who also made gifts as a nonresident not a citizen and as a U.S. citizen in the same year files Form 709 (IRS, Gift tax).

Residence Here Means Domicile, and the Income Tax Test Does Not Apply

This is the trap on an international file, and the Code sets it deliberately. The familiar residency rules for aliens open with their own scope limit: for purposes of this title (other than subtitle B) (26 U.S.C. 7701(b)(1), 2024 edition). Subtitle B is Estate and Gift Taxes. The green card test and the substantial presence test are switched off for this chapter by the very provision that creates them.

What replaces them is a facts test. A resident is an individual who has his domicile in the United States at the time of the gift (26 CFR 25.2501-1(b)). The same paragraph closes the class from the other side, that all other individuals are nonresidents (26 CFR 25.2501-1(b)). The regulation then defines the acquiring and the keeping of a domicile in two sentences that pull in opposite directions:

A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of moving therefrom. Residence without the requisite intention to remain indefinitely will not constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal.

So presence without intent is not enough, and intent without departure is not enough either. A client can be a nonresident alien for income tax and a US resident for gift tax in the same year, on the same facts. The general meaning of the term, and where else in the Code it decides an outcome, is in domicile.

One narrowing rule follows from the status, and it opens with its own exception. Except as provided in paragraph (3), paragraph (1) shall not apply to the transfer of intangible property by a nonresident not a citizen of the United States (26 U.S.C. 2501(a)(2), 2024 edition). Paragraph (3) turns that exception back on for a donor to whom section 877(b) applies for the taxable year which includes the date of the transfer (26 U.S.C. 2501(a)(3)(A), 2024 edition).

Transfers the Section Puts Outside Itself

Two carve-outs sit in the imposition section rather than among the deductions, which means the tax never reaches those transfers at all.

Paragraph (1) shall not apply to the transfer of money or other property to a political organization, within the meaning of section 527(e)(1), for the use of such organization (26 U.S.C. 2501(a)(4), 2024 edition).

Paragraph (1) shall not apply to the transfer of money or other property to an organization described in paragraph (4), (5), or (6) of section 501(c) and exempt from tax under section 501(a), for the use of such organization (26 U.S.C. 2501(a)(6), 2024 edition). Note which paragraphs of section 501(c) are named and which are not, because the list is narrower than “charities”.

Common Questions

Accountably places trained offshore tax preparers inside US CPA and EA firms, working under the firm’s own review, and a firm can put a block of its own return work through a trial task before a client file depends on it.