If your mother writes you a birthday check and gets nothing but love in return, it's potentially taxable -- depending on how much she gives you. Anytime someone gives you something for less than full value -- money, stocks, furniture -- the IRS counts it as a gift. Fortunately, the gift-tax rule allows your parents to shield lots of what they give you from the taxman.
Parents are allowed to gift their children $15,000 each per year without paying a gift tax.
The annual gift tax exclusion lets any individual -- your parent, you, your child -- give up to $15,000 a year, as of 2019, to any other person without paying tax. That limit applies per person, per year -- your father could give you $15,000, your sister $15,000 and his best friend $15,000 and still not pay gift tax. Married couples get double the tax break: Your father and mother can give you $30,000 and pay no tax.
Tuition and Medicine
Any money your parents pay for your tuition is excluded from gift tax, and doesn't count toward the $15,000 cap, as long as they pay it directly to the school. The school has to be one with a regular faculty and curriculum, and a body of students enrolled and attending in the flesh. If your parents pay your medical bills -- again, paying the money directly to the hospital or doctor, not to you -- that's tax-free and cap-free too.
When your mom gives you more than $15,000 one year, she can choose to pay gift tax, or she can choose to use something known as the "unified credit" instead. The unified credit is an amount of money that people can give away in their lifetimes tax-free -- roughly $11.4 million at the time of publication -- but for every dollar your mom gives you using her unified credit, she gets one less dollar sheltered from the estate tax after her death.
For example, if she gives you $1 million during her lifetime using her unified credit, she can leave only about $10.4 million estate-tax-free after she dies.
When your parents give you more than $15,000 each, they must report the taxable amount on form 709. They do this even if they use the unified credit to avoid paying the tax. If the gift is something other than cash, the size of the gift is its fair market value -- what it would fetch if your parents sold it to a stranger. Your parents should include an appraisal stating the fair market value along with the tax form.
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