When it comes to taxation matters related to gifts of cash and property, the United States Internal Revenue Service (IRS) has a quite a few provisions, rules and comments. In general, a taxpayer who receives some money as a gift is not earning income and does not have to worry about reporting; however, there are exceptions in certain situations. The same cannot be said about the person making the gift, who may be subject to reporting requirements.
Individuals making or receiving gifts who are not sure about their reporting obligations should seek the advice of a tax attorney, a CPA or the IRS.
Gift Taxes in the United States
It is important to understand what constitutes a gift. A clear example is a couple who put together a few hundred dollars to give to their college-age daughter as a Christmas present. The IRS will consider the couple to be donors who may be subject to paying a tax on gifts made. The following exceptions apply:
– Gifts made to spouses
– Tuition payments
– Medical expenses
– Political donations
Gifts cannot be deducted from income earned, unless they are actually contributions made to charitable organizations. When it comes to gifting cash to children, the current exclusionary amount is $14,000 for one parent and $28,000 for both parents
When property is gifted instead of cash, a fair value calculation must be conducted to determine if the exclusions above will apply. If, for example, a couple jointly owns an apartment valued at $50,000 that they decide to grant to their daughter, they would have to report their gift on Form 709. There is, however, a method that can be used to defer payment on this gift: The lifetime credit for gift exemptions is greater than a million dollars, which means that parents can take advantage of it to make considerable cash and property gifts to their children over the years.
When a foreign individual or business entity makes a cash gift to a taxpayer in the U.S., the recipient may have to complete Form 3520 if the amount is higher than $13,258 and the gift was made by a foreign business. This reporting requirement extends to all gifts received from foreign individuals when they add up to more than $100,000 in a single year.