How is the donor's tax determined?

The donor's tax is determined based on the fair market value of gifts made above exemption limits. This means that when a donor gives gifts to recipients, they can exclude a specific amount (annual exemption) from taxation. Any gift amounts that exceed this exemption limit are subject to taxation, and the tax is calculated based on the fair market value of those excess gifts.

This approach ensures that the tax is applied only to substantial gifts that exceed the stipulated thresholds, rather than imposing a tax on every gift made. The tax rates can vary depending on the amount gifted and the donor's total lifetime gifts, aligning with progressive tax principles.

In contrast, the options related to a flat rate for all gifts, the number of gifts made, or the relationship of the recipient to the donor do not accurately capture how the tax is applied. The key factor is the fair market value of gifts above certain exemption limits, making it crucial for donors to track their giving in relation to these thresholds.