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 In California, the gift tax law is based on federal rules of taxation found in the IRS tax code. There are a multitude of different taxes the federal government imposes on different financial situations, especially when the situation involves an individual receiving financial gain or income. There’s even such a thing as death tax, meaning in some cases the person you leave your savings, money, or property to in your will is going to have to pay a tax on the value of the property, or a percentage of tax on the money he or she was left. This is also the case with gift tax, meaning that while you’re still alive, in some cases the person you gift any property or money to will have to pay a percentage of tax on the gift you’ve given, and in some cases you may be taxed for gifting the item as well. To understand this, you must understand the gift tax law in California

Publication 950 in California

Federal taxes apply to all California residents, and the gift tax law is found in the federal code. The Internal Revenue Service has released an informational document, referred to as Publication 950. This document explains in what instances a person is considered exempt from the gift tax and when either the giver or the receiver may be subject to having the IRS impose a tax. Other information that is explained in this document are:

When a tax is or is not owed because of the gift or unified creditWhen a gift or death tax either would or would not be appliedWhen an estate tax either would or would not be appliedWhen an individual should file a tax return for either a death or a gift tax situation

Gift tax and the State of California

The fact of the matter is that in most cases, gifts that are given from one person to another are not subjected to having the gift tax imposed on them, just as most cases of estate transfer are not subject to having the estate tax imposed on them. If the gift given is from you to your spouse, for example, your spouse will not be taxed on the gift. Parents can also give tax free gifts to their kids in the amount of $24,000 per year per parent per child. In addition, the gift of repayment of student loans or educational costs is not generally subject to gift tax as long as the payment is made directly to the lender or the institution.

Getting Help

If you are going to be giving or receiving a gift, you should consult with a qualified tax attorney to learn about what, if any, tax consequences this will have. A California attorney can explain to you how to structure your giving so that both you and recipient pay the least amount of taxes possible.

It is a common belief that the recipient of a taxable gift has to pay the tax.

Federal tax law is different than that: the person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value. Instead, if you recently gave any one person gifts that are valued at more than $12,000, you - the maker of the gift - must report the total gifts to the Internal Revenue Service and you may have to pay tax on the gifts.

If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift. Gifts also include money and property, including the use of property without expecting to receive something of equal value in return.

There are some exceptions to the tax rules on gifts. The following gifts generally are not taxable and do not count against the $12,000 annual limit:

Tuition or Medical Expenses that you pay directly to an educational or medical institution for someone's benefitGifts to your Spouse

Gifts to a Political Organization for its use

Gifts to Charities

If you are married, both you and your spouse can give separate gifts of up to the annual limit of $12,000 to the same person without making a taxable gift. In other words, you and your spouse can give one of your children (or anyone else for that matter) a $24,000 gift of cash or other property during any one year without paying any gift tax. This is commonly known as splitting gifts between spouses. Essentially, it means a gift by you or your spouse to a third person can be considered as made one-half by each of you provided there is consent by both spouses.

For more information, get the IRS Publication 950, Introduction to Estate and Gift Taxes, IRS Form 709, United States Gift Tax Return, and Instructions for Form 709. They are available at the IRS Web site at IRS.gov in the Forms and Publications section or by calling 800-TAX-FORM (800-829-3676).

Gift tax planning often requires the help of a qualified tax lawyer. Please call attorney Mitchell A. Port at 310.559.5259.

Source: http://www.californiaprobatelawyerblog.com/2008/03/gifts_and_your_taxes.html