Cash gifts are not treated as income for tax purposes. If you receive a cash gift, you don't report it or pay tax on it. The person making the gift -- the donor, in the language of the Internal Revenue Service -- might need to pay tax on the gift amount, depending on the value of the gift and any other gifts the donor makes during his lifetime.
The Giver Pays Twice
It sounds counter-intuitive, but the person who makes the gift -- not the recipient -- pays the tax man. Suppose, for example, that your father writes you a check for $20,000 on your graduation day. You might think that you report the check as income and pay tax on it, but you do not. Recipients never have to pay gift tax. Your father, on the other hand, must report the gift to the IRS and pay tax on the cash amount if tax is due.
Generally, small gifts avoid gift tax. The IRS allows each donor to gift money and money equivalents up to the amount of his annual personal exclusion each year without paying tax. In 2014, the individual exclusion is $14,000. The exemption applies to each recipient. For example, a donor can gift a $14,000 to each of his four children -- $56,000 in total -- and pay no gift tax. A married couple can give a total of $28,000 per recipient without having to pay gift tax, doubling the size of the tax-free gift.
A donor who makes gifts that exceed his annual exclusion may still be off the hook for paying taxes on them. A second tier of exemption, known as the lifetime exemption allows donors to make tax-free gifts during their lifetime and at death to a basic exclusion amount, which is $5.34 million as of 2014. However, for estates over that amount, high-value lifetime gifts might increase the estate taxes due at death. Thus, some donors prefer to pay gift taxes as they fall due.
Some monetary gifts are exempt from gift tax irrespective of the amount. These "freebies" include gifts to qualifying charities and political organizations, tuition or medical expenses paid directly to the institution for someone else and gifts to a spouse.
Reporting Gift Tax
Gifts exceeding the annual exemption are reported on Form 709, the Gift Tax Return. Gift tax returns must be filed by April 15, unless you file for an extension.
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