Who Pays Income Taxes on Monetary Gifts?

by Jayne Thompson, Demand Media Google
    The gift-giver pays the tax.

    The gift-giver pays the tax.

    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.

    Annual Exclusion

    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.

    Lifetime Exemption

    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.

    Tax Freebies

    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.

    About the Author

    Jayne Thompson qualified as a solicitor in 1996. She holds a first degree in law and business from the University of Birmingham and a Master of laws from the University of East London.Thompson shamefully admits to using her family as fodder for the lifestyle and parenting articles she also writes, which have appeared most recently in "The Green Parent" magazine.

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