If you receive a gift from your parents, it will be tax free for you no matter how much the present is worth. However, your parents may have to pay a tax on the value of the gift if it is worth more than the annual exclusion that the Internal Revenue Service allows for gifts. Gift-tax rates are the same as income-tax rates.
The major figure to remember for gift taxes is the annual exclusion, which was $13,000 as of 2012. That represents the largest possible gift value that someone can give to someone else in a calendar year without being required to pay a gift tax on the money. The limit counts for each individual recipient, so a parent can provide a gift of $13,000 to each child without paying taxes on the money. The limit also is not constricted by marriage. A couple can provide a gift of $26,000 to one of their children, representing a $13,000 contribution from parent.
The $13,000 annual exclusion applies to non-cash gifts, too. For instance, a parent who gives a piece of property to one of their children must pay gift taxes if the fair value of the property exceeds the annual exclusion limit. The fair value of a piece of property, which could include land, a car or many other items, represents a reasonable calculation of the price that the property would have attracted in the marketplace.
Tuition or Medical Expenses
In limited circumstances, parents or others can provide gifts that are larger than the annual exclusion without having to pay taxes on the money. Those circumstances are restricted to payments for tuition and medical expenses. However, the payments must be made directly to the college or medical service provider that provided the services. The gifts cannot be made to the recipient of the services or the gift tax will triggered.
Gift Tax Charge
Your parents could be responsible for the gift tax even if the exchange was not an outright gift. For example, the IRS considers a sale of property at a price below fair market value to be a gift when it is made to a relative. The IRS defines fair market value as the price at which property would be sold between a willing buyer and a willing seller and recommends that a professional real estate appraisal be used to determine fair value. Similarly, the IRS sets the interest rates each month that it allows for private loans. A loan with a rate below the IRS barrier is considered a gift for tax purposes.
Tom Gresham is a freelance writer and public relations specialist who has been writing professionally since 1999. His articles have appeared in "The Washington Post," "Virginia Magazine," "Vermont Magazine," "Adirondack Life" and the "Southern Arts Journal," among other publications. He graduated from the University of Virginia.