Updated for Tax Year 2017
Surprise – Mom and Dad gave you a nice check! Maybe it’s enough for dinner, or maybe it’s more of an “early inheritance.”
Either way, do you need to worry about paying tax on your gift?
Annual limits before the IRS takes notice
First, a gift must be quite substantial before the IRS takes notice.
A gift of $14,000 or less in a calendar year doesn’t even count.
If a couple makes a gift from joint property, the IRS considers the gift to be given half from each. Mom and Dad can give $28,000 with no worries.
A couple can also give an additional gift of up to $14,000 to each son-in-law or daughter-in-law.
The effective annual limit from one couple to another couple, therefore, is $56,000 ($14,000 X 4 = $56,000). Splitting these gifts up is an effective way to avoid paying gift tax.
Gifts that don’t count
Some transfers of money are never considered to be gifts, no matter the amount.
For purposes of the gift tax, it’s not a gift if:
- It’s given to a husband or wife who is a U.S. citizen. Special rules apply to spouses who are not U.S. citizens.
- It’s paid directly to an educational or medical institution for someone’s medical bills or tuition expenses. (It doesn’t have to be a child, or even a relative, for this exception.)
Gift tax is not an issue for most people
The person who makes the gift files the gift tax return, if necessary, and pays any tax.
If someone gives you more than the annual gift tax exclusion amount ($14,000 in 2017), the giver must file a gift tax return. That still doesn’t mean they owe gift tax.
For example, say someone gives you $20,000 in one year, and you and the giver are both single. The giver must file a gift tax return, showing an excess gift of $6,000 ($20,000 – $14,000 exclusion = $6,000).
Each year, the amount a person gives other people over the annual exclusion accumulates until it reaches the lifetime gift tax exclusion.
Currently, a taxpayer does not pay gift tax until they have given away over $5.49 million in their lifetime (2017).
Does the gift recipient ever have to pay gift tax?
If the donor does not pay the tax, the IRS may collect it from you.
However, most donors who can afford to make gifts large enough to be subject to gift taxes can also afford to pay the tax on the gifts.