When your parents spend money on you -- whether it's giving you cash or buying you a car -- it isn't taxable income. You never pay tax on a gift. If you're working for your parents in some capacity, that's different: you pay tax on whatever they pay you, just as if you were working for a stranger.
Cash is a gift in the eyes of the IRS if you don't give your parents something of equal value in return. This applies to cash they give you directly and money they spend on your behalf. Paying a power bill or tuition that you can't afford or donating to your favorite charity -- all of these count as gifts, so there's no tax. There's also no tax if your parents give you something below market value -- allowing you to pay half the going rate to rent an apartment, for instance.
Although you don't pay tax on cash or other gifts, your parents may have to. As of 2012, if your parents each give you more than $13,000 a year -- $26,000 total -- they must report the gift to the IRS, and it may be subject to gift tax. Up to that limit, there's no tax. Gift tax discourages taxpayers from giving away so much from their estate that they can duck estate tax later.
When you work for your parents, taxable income can include more than just salary or wages from a 9-to-5 job. If they pay you to babysit your younger brother or a sick grandparent, for instance, that counts as income. Money you get for them in the form of employee awards, profit-sharing or end-of-year bonuses is also taxable. You don't have to pay tax on cash that unrelated workers wouldn't pay income tax on, such as mileage reimbursement.
When your parents claim you as a dependent, you may not have to file even if they pay you taxable income. If your work for them -- or for anyone -- earns you less than the standard deduction, you don't owe taxes. As of 2012, the deduction is $5,800. If your unearned income, such as interest or dividends, is over $950 you have to file. IRS Publication 929 provides a formula for calculating when you need to file if you have a mix of earned and unearned income.
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