Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

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What happens to the excess gift amount over $13,000?

It is taxable to the recipient
It is taxable to the donor
It is exempt from taxes
It reduces the donor's annual exclusion

The correct answer is: It is taxable to the donor

The correct answer relates to how gift taxes are applied under current tax laws. When an individual gives a gift that exceeds the annual exclusion limit, which is set at $13,000 (as of the tax laws in effect for 2023), the excess amount is considered taxable to the donor. Specifically, the donor is responsible for reporting this excess gift amount to the IRS using the appropriate gift tax forms. Although the recipient of the gift does not pay tax on the amount received, the responsibility for any tax implication falls on the donor if their total gifts exceed the annual exclusion limit. Additionally, the donor can utilize their lifetime gift exemption to offset gift taxes for larger amounts gifted over time. This treatment ensures that the federal government can maintain oversight over larger gift transactions that could impact wealth transfer and taxation strategies.