Gift tax is charged when any transfer of property takes place from one person to another where the donor receives nothing or less than the full value of the item in return. The gift tax is to be paid by the donor, not the recipient. The idea behind the gift tax is to prevent people from giving away their money as gifts to avoid federal estate tax.
Gift tax applies to any transaction regardless of whether the donor intends it to be a gift or not. Even financial transactions where money, property, or assets are sold at less than full value are considered gifts for tax purposes. Therefore, any interest-free loans or loans at reduced interest also fall under this category. As the annual limit for making gifts is quite high, people usually do not have to pay gift tax when they give.
For 2014, individuals can give up to $14,000 in gifts without being charged gift tax. For those filing jointly, the limit doubles to $28,000. You and your spouse can together give gifts up to $28,000 without paying gift tax. The number of people to whom you can give gifts within this limit is not restricted.
Additionally, as of 2014, you can also give up to $5.34 million in your lifetime without worrying about gift tax. You need to keep gift tax in mind only if you give away more than the annual or the lifetime limit.
Transfer of Property
The rules for giving away certain property as gifts are somewhat different. If you give away property as gift, the tax charged on it will be whatever your tax basis was. The receiver will owe tax on appreciation. On the other hand, if the receiver inherits the property, then the fair market value of the property will be considered at the time of the transfer. In this case, the appreciation becomes tax-free.