One of the most frequently asked questions to the IRS is whether a gift received by someone is taxable. The answer is not always straightforward, as it depends on several factors, including the value of the gift, the relationship between the giver and recipient, and the purpose of the gift. In this article, I’ll talk about US gifts taxed rules and help you determine if a gift you receive is taxable.
What is a gift tax?
First, let’s define what we mean by “gift tax.” In the United States, the gift tax is a tax on the transfer of property or money from one individual to another without receiving anything in return. The IRS considers any transfer of property or money as a gift if the giver does not receive full value in return. The gift tax is a tax on the transfer of property or money and is paid by the giver, not the recipient.
Gift tax rules
Now that we know what a gift tax is let’s go over some of the rules surrounding it:
- Gift tax exemption: The IRS allows individuals to give away a certain amount of money or property each year without incurring gift tax. As of 2021, the annual gift tax exemption is $15,000 per recipient. This means that you can give up to $15,000 to any individual each year without having to pay gift tax.
- Lifetime gift tax exemption: In addition to the annual gift tax exemption, the IRS also provides a lifetime gift tax exemption. This is the total amount that an individual can give away over their lifetime without incurring gift tax. As of 2021, the lifetime gift tax exemption is $11.7 million per person. Any gift that exceeds the annual gift tax exemption counts towards the lifetime gift tax exemption.
- Spousal exemption: Gifts given to a spouse are not subject to gift tax, as long as the spouse is a US citizen.
- Gift splitting: Married couples can “split” their gifts, which means that they can give up to $30,000 to an individual in a single year without incurring gift tax. This is because both spouses can apply their annual gift tax exemption to the gift.
Is the gift I received taxable?
Now that we know the rules surrounding gift tax let’s answer the question: is the gift I received taxable? The answer depends on several factors, including the value of the gift, the relationship between the giver and the receiver, and the purpose of the gift.
- Value of the gift: If the gift you received is valued at less than $15,000, then it is not taxable, and you do not need to report it to the IRS. However, if the gift is valued at more than $15,000, then the giver may need to pay gift tax. The amount of gift tax owed depends on the value of the gift and how much of the lifetime gift tax exemption the giver has already used.
- Relationship between the giver and the receiver: Gifts given between family members are generally not subject to the gift tax. This includes gifts given between spouses, parents, children, and siblings. However, if the gift is given between friends or acquaintances, it may be subject to the gift tax.
- Purpose of the gift: If the gift is given for a specific purpose, such as paying for tuition or medical expenses, then it may not be subject to the gift tax. The IRS has specific rules surrounding gifts given for educational or medical purposes, so it’s important to consult with a tax professional if you are unsure.
Reporting gifts
Even if the gift you received is not taxable, you may still need to report it to the IRS. This is because the IRS requires individuals to report gifts that exceed the annual gift tax exemption, even if no gift tax is owed. Here’s what you need to know about reporting gifts:
- Form 709: If you receive a gift that exceeds the annual gifts taxed exemption, the giver will need to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. This form is used to report gifts that exceed the annual gift tax exemption and to track how much of the lifetime gift tax exemption the giver has used.
- No tax owed: Just because the giver needs to file Form 709 does not mean that gifts taxed is owed. The form is simply used to report the gift to the IRS and to track how much of the lifetime gift tax exemption the giver has used.
- Reporting requirements: If you receive a gift that exceeds the annual gift tax exemption, you do not need to report it on your tax return. However, if you receive multiple gifts from the same giver in a single year, you may need to report them on Form 709.
- Gift splitting: If you receive a gift that exceeds the annual gifts taxed exemption and the giver is married, they may be able to split the gift with their spouse, which means that both spouses can apply their annual gift tax exemption to the gift. This can help reduce the amount of gift tax owed.
Additional gift tax tips
Here are some additional tips to keep in mind when it comes to gift tax:
- Keep track of gifts: If you receive a gift that exceeds the annual gifts taxed exemption, make sure to keep track of the value of the gift and the giver. This information will be important if the giver needs to file Form 709.
- Consider estate tax: Gift tax is closely linked to estate tax, which is a tax on the transfer of property after death. If you are the recipient of a large gift, you may also inherit property from the same person in the future. In this case, you will want to be aware of the estate tax implications of the gift.
- Consult with a professional: If you are unsure about the tax implications of a gift you have received, it’s always a good idea to consult with a tax professional. They can help you understand whether the gift is taxable and what reporting requirements may be involved.
- Don’t let tax considerations overshadow the gift itself: While it’s important to be aware of the tax implications of a gift, it’s also important not to let tax considerations overshadow the gift itself. Remember that a gift is a gesture of generosity and kindness, and the tax implications should not detract from the spirit of the gift.
Gift tax can be a complex topic
In conclusion, whether a gift is taxable depends on several factors, including the value of the gift, the relationship between the giver and the receiver, and the purpose of the gift. If the gift is valued at less than $15,000 and is given between family members, it is generally not subject to the gift tax. However, if the gift exceeds the annual gift tax exemption or is given between friends or acquaintances, it may be subject to the gift tax. Additionally, even if the gift is not taxable, the giver may still need to file Form 709 to report the gift to the IRS.
Gift tax can be a complex topic, but as a recipient of a gift, you generally do not need to worry about paying gift tax or reporting the gift on your tax return. However, it’s always a good idea to be aware of the rules surrounding gift tax to avoid any surprises come tax time. If you have any questions about the gift tax, it’s important to consult with a tax professional.
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