What does the gift tax apply to?

The gift tax specifically applies to the transfer of money or property from one individual to another without receiving adequate compensation in return. This tax is designed to ensure that individuals pay a tax on the value of significant gifts they give during their lifetime. The IRS imposes this tax because large gifts can potentially circumvent the estate tax, which is assessed on the value of a deceased person's estate.

When one person gives a gift to another, it is considered a taxable event if the value of that gift exceeds a certain exclusion limit set by the IRS for a given year. The gift tax rate can vary based on the total amount of taxable gifts made during a person’s lifetime, with any amount above the exclusion limit adding to the taxable estate of the giver.

Other choices detail different forms of taxation that do not relate to gifts. Income earned from investments refers to income tax, not a gift tax. Inheritance received from a deceased individual pertains to estate tax, assessing the estate of the deceased rather than gifts given while living. Selling property for less than its value relates to a transaction involving capital gains or losses, not gifts at all.

Thus, the gift tax's sole focus on inter vivos transfers of wealth between individuals makes understanding its applicability essential for accurate tax planning and reporting