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Gift Tax: Don’t Fear Taxes When You Give (Or Receive)

Gift tax rules allow tax-free gifts up to $14,000. How does the gift tax work? Do you owe taxes on a cash gift? How much can you give before paying tax?


The gift tax rules allow you to give or receive up to $14,000 before incurring taxes.When generous Aunt Betty slips you a $5,000 check on your birthday, do you have to pay taxes on her cash gift? And when you send an annual donation to your favorite charity or alma mater, does anybody pay taxes on that gift? The answer in both cases is no, although as silly as it sounds, gift givers must pay taxes on some gifts.

Luckily, recipients never pay a gift tax and the limits at which the gift tax kicks in for givers are high enough that most people will never pay taxes on their gifts. But as your wealth grows over time, the gift tax may start to affect you. Let’s answer your burning questions about the gift tax.

What Constitutes a Gift?

A gift is when someone gives to someone else something of value (cash, property, use of property, etc.) without expecting anything in return. Additionally, if you were to sell something you own for considerably less than its value, then this could be considered a gift. For example, if you own a car worth $15,000 and you want to sell it to your brother for $10,000 as a favor to him, the $5,000 difference could be considered a gift.

It’s important to note that support from your parents or guardians while they can still claim you as a dependent does not constitute a gift. Your parents can give you all the money in the world while they are claiming you on their taxes and it will never be taxed as a gift. However, as soon as you lose dependency eligibility, their support may be taxed as a gift.

Annual Gift Tax Limitations

Before you start tallying up every dime you gave to your niece as a present, don’t worry about it. Most presents to friends and family will fall below the annual threshold for taxable gifts.

In 2014, a taxpayer can give up to $14,000 per person per year without being taxed on the gift. For example, this year you could give Friend A $14,000, Friend B $14,000, and your sister $14,000 and not be taxed on your gifts.

However, if you gave $14,000 to Friend A, but $15,000 to Friend B, you would then be taxed on that $1,000 gift to Friend B. (So, as you can see, unless you’re regularly throwing around five-figure gifts, the gift tax limitations will exclude the gifts most of us give and receive).

Gift Tax Exclusion

Luckily, the IRS understands that some gifts are necessary and therefore excluded from the gift tax. There are unlimited exclusions (they are never taxable) for the following gifts:

  • Charitable gifts
  • Gifts to political organizations
  • Gifts between spouses
  • Educational and medical gifts (see explanation below)

To receive the exclusion for the educational and medical gifts, you must give this gift directly to the medical or educational institution. For example, if your aunt is having surgery that will cost $50,000 and you want to provide your aunt the money for the surgery, you must give the $50,000 directly to the hospital. You may not give this money to your aunt or you will be subject to gift tax on the amount that exceeds $14,000. This same rule applies for educational gifts (for example, if your friend or brother was attending a college).

Also, note that charitable gifts may be eligible to be claimed as an itemized deduction on your individual income tax return.

How To Avoid The Gift Tax

The best way to avoid the gift tax is pretty self-explanatory: do not give gifts that exceed $14,000 per person per year.

Also, another way for parents to avoid the gift tax is to remember that each parent is entitled to their own individual $14,000 exclusion. This means that your mother and father could each give you $14,000 this year – for a total of $28,000 – without being taxed on that gift. This is referred to as “gift-splitting”.

Although estate tax (the taxation of an individual’s assets after they die) is an entirely different subject, it ties in well with gift tax. Many people who want to avoid paying the lofty estate tax when they die can slowly gift their assets and money as they get older. Many people choose to start giving gifts up to the exclusion amount to their heirs as they reach old age. This makes a lot of sense and is a smart and legal way to avoid or mitigate the estate tax when someone dies.

Don’t Be Afraid To Give (Or Receive)

Overall, the gift tax does not affect very many people in their teens or twenties. So, don’t worry about that $20 you gave to you brother for his last birthday— it won’t be taxed (under current tax law anyway). The same is true if you receive a larger gift from a generous relative…as long as it’s less than $14,000 per year. The gift tax can be easily avoided throughout life just by following certain limitations set out by the government.

Now that you have all the facts about the gift tax, don’t be afraid to get generous this year!

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About Amber Gilstrap

Amber is a twenty-something CPA from Kansas City, Missouri who loves writing, working out, and---of course---finding fresh ideas for saving money. Follow her on twitter @ambergilstrap.

Comments

  1. Very informative. Thanks. If someone gifted me $50,000 (well over the annual max of tax free territory) and I immediately gave/gifted this check to someone else, would it be subject to 2 gift taxes?

  2. It is my understanding that the way you receive property or cash does not affect your ownership of it. Therefore, if you give something that you received as a gift and don’t expect anything in return, you are still gifting that to that person. If it is above the exclusion threshold, it could be taxable as a gift. Hope this helps!

  3. P.S. If you immediately gave that gift to a charity, college, or medical institution (as I listed above) it would not be subject to gift tax to you (but it would be taxable to the person that gave it to you). :)

  4. My soon-to-be ex-husband has fallen onto hard medical times and has incurred huge medical debts. In order to qualify for medical assistance to cover the bills, he is only allowed $20K in assets. He has stock valued at over $160K. Can he gift the stock to someone and what ramifications would there be relative to taxes for either party.

  5. @ Josey. No. Im no expert, but if anyone tries to hide money from a creditor , they can go back five years and get it back.

  6. P.S. not to mention insurance fraud.

  7. My ex gets over $24,000 a year from his parents. They pay all of his bills and give him a several hundred dollars a month allowance PLUS he works a full time job! How does he not have to pay taxes on this money or them for that matter, and none of that EXTRA money is considered income when it comes to child support. How are they allowed to do this??? Or are they???

  8. Hi!
    Is the gifting amount for 2011 the same as for
    2010 ($13,000.00)? Thanks

  9. Hello. If I receive a gift over $13,000 will I need to pay a tax on it? I was a little confused about being on the receiving end. Thanks!

    • Hi Mandy. No. The giver of the gift has to pay taxes on gifts above the limit. The receiver does not pay tax on the gift they receive.

      • Forgot to mention the lifetime exclusion; you can give a total of up to $1 million in gifts – $5 million starting in 2011!!!- that exceed the annual limit in your lifetime, before you start owing the gift tax. If you give $15,000 each to ten people in 2010, for example, you’d use up $20,000 of your $1 million lifetime tax-free limit—ten times the $2,000 by which your $15,000 gifts exceed the $13,000 per-person annual gift-free amount for 2010.

  10. Can gift tax be avoided this way?-
    Divorced dad has 104k, wants to give it to his daughter. He gives her 13k with 87k left. He gives 13k to 7 other people. Each of those 7 people then give 13k to the daughter totaling the 100k.

    • Opps math was off should have read – Divorced dad has 104k, wants to give it to his daughter. He gives her 13k with 91k left. He gives 13k to 7 other people. Each of those 7 people then give 13k to the daughter totaling the 104k.

      • I’m no expert Kirk. But, tax law says you can give $13k tax free to each person you want. If the receiver then turns and gives that to someone else, it is again tax free. BUT, if it is done with instruction… “I will give you this money, if you will give it back to my daughter…”, I bet this would not pass audit. Any “wink wink” gift that goes from one person to another like that would probably be disallowed if the “truth” came out. I’d consult a CPA. If done over time… you give this year, and a year or two later the receivers give something to someone else… who knows. But, I certainly wouldn’t do it within the same year.

      • Also, please see my notes to Mandy above, particularly about the annual exclusion.

  11. James, thank you for the response. Ill have to talk to a CPA about this. I think you might be right that the IRS is aware of this loop hole.

    About your notes to Mandy. I believe you have interpreted the law incorrectly.

    If you give 10 people 15k in 2011, 13k/person is tax free (130k).The other 2k/person (20k) is taxable. You would be using up 130k of your 5 million lifetime tax-free limit. Yes you can give up to 5 million in your life time tax free but no more than 13k per person per year.

    • Hi Kirk. Actually, you’ve made a mistake. Remember, the first $13,000 isn’t on the IRS radar… it is tax free. If you give $1 over $13,000, that $1 is now on the IRS radar… but you can exclude that $1 by using up $1 of the $5m exclusion. Another way to say it… I can give $13,000 to a zillion people tax free, but the moment I give $13,001 to one person, that extra $1 is now taxable, but can be eliminated by the first dollar of the $5 million exclusion. Make sense?

  12. Question on how to report $ received as gift from one per

    • Question continued:

      Received gift money from one person in the following ways.

      2 transactions:

      A. $15k international wire transfer to bank.
      B. $10k check from US bank.

      I know I have to report $ received to the IRS, but I am confused on how to do this.

      • Maria, you do NOT have to report a gift you received to the IRS. Gift tax is paid by the giver, not by the person receiving the gift.

        Now, if you got a huge gift from someone and deposited it in a bank, the bank may have some responsibility to report a huge deposit to the IRS (I don’t know the numbers), but it is my understanding that you still don’t have to report it, as it was a cash gift to you. Now, if someone gives you stock that you turn around and sell at a profit, you will have to pay tax on the increase in value. But, again, you don’t have to report cash gifts that you received to the IRS. Could you imagine if every person who got a cash gift had to report it as income on their taxes?!! Chaos.

      • ACTUALLY, MARIA, I MISSED THE “INTERNATIONAL” PART OF YOUR POST. Large gifts from international sources have to be disclosed, but still don’t trigger a tax to the person who gets the gift. The IRS in that case would be worried that large gifts to a person a not true gifts, but are a transfer of wealth. Please go to http://www.irs.gov and look up Form 3520, and read the instructions. Again, you will not have to report the two gifts you mention (the international gift is too small to disclose, and the second sounds like “just a gift”, and you wouldn’t pay tax on either one.

  13. Got a tough one here: My wife’s family is from South America, we live in Chicago. They wanted to invest $100K to buy a property here but couldn’t get a loan. We could get a loan for them but wold need the $100k in our bank account to apply. If they give us $100K as a gift then we got a loan for a new home, do we have to pay taxes $100k gift money? I see posts where the giver pays the loan but they don’t live in the US so they file their taxes here.

  14. I want to gift my son $20,000 this year for a down payment on a house. I have never given any large sums before so will I have to pay tax on $7000 or does it fall into that $5 million exclusion?

    • The $5 million exclusion is a lifetime exclusion. Based on just the factors in your comment, you would have to pay taxes on that $7K. If you could wait until the first of 2012 to gift him the other $7K, then you would not have to pay gift tax. Also, if your son is married, you could him $13K and give his wife $13K and not have to pay gift tax. OR, if you’re married, you and your wife could both gift him $13K without being taxed.

    • Amber, you are incorrect. George would be able to use up $7,000 of his $5 million exclusion. He would not be taxed on that $7,000 (unless he has already used up his $5m.)

  15. Thanks so much for your response but it seems to contradict what you told Kirk on January 12. I understand the $7000 (20-13) is REPORTABLE. But what I thought I understood was that the TAX would not be paid because of the $5 million exclusion?

    • I think you saw Amber’s reply. She is incorrect. You understood correctly.

  16. I PURCHASED A $500.00 MATTRESS AND BOXSPRINGS FOR NEIGHBOR WHOSE HUSBAND DIED DURING HIS SLEEP IN THEIR BED. CAN I USE THIS AS A GIFT TAX?

    I ALSO PAID FOR AN APPRAISAL ON NEIGHBOR HOME SO SHE COULD PAY FOR THE BURIAL?

    IS ANY OF THIS TAX DEDUCTIBLE?

    • Sorry, Vickie, but no. You are confusing Gift Tax with Charitable gifts. If you give someone a lot of money (see comments above about the $5 million exclusion), you may owe tax on a gift you give. If you gave someone a mattress you purchased, this is a very small gift that you wouldn’t owe gift tax on.

      Now, for you to be able to deduct a charitable gift to someone… that someone has to be an approved charity or non-profit, like the Red Cross or United Way or a University. But, you will have to itemize on your taxes to take a deduction for this. Your gifts of the mattrees and paying for an appraisal, while very nice, are not tax deductible. Sorry.

  17. I was wondering if it is mortgage fraud if somebody were to get a gift of over 100k to buy a house and tell the mortgage company that it was a gift, but with the intent to repay it at a later date.

    • Uh… I have no idea. But, I would be willing to be nobody at the mortgage company would be able to read your mind. Maybe a chat with a CPA with mortage experience would be in order.

      • I asked that because my grandparents are trying to force my mom to repay a gift to my mom and step-dad

  18. James appears to be the only one that has this right. If I give $50,000 to my daughter, $13,000 comes under the Gift Tax Exclusion and the other $37,000 is filed on form 709 when the donor files their taxes and is deducted freom their $1 million lifetime exclusing. NO TAXES ARE PAID BY ANYONE AT THAT TIME. If you do this and stay below hte $1 million lifetime exclusion, no taxes are paid by anyone, not the donor, not the recipient.

  19. adrian martinez says:

    My in-laws are from Canada and want to gift us $25,000 to pay down our mortgage. Now do they need to pay taxes on the $25,000 gift since there from Canada and should we just have them write us 2 checks for $13000 and $12500 one for me and another for my wife.

    • Adrian, since this involves a gift from a Canadian citizen, not an American, the gift tax rules that would apply to them would be different (they don’t file American tax returns, presumably, so they wouldn’t have the same $13,000 annual exemption, etc). Please read my comments to Maria near the top of this page; if you still have a question, a CPA would be able to help you answer this.

  20. Hello, my boyfriend wants to give me a gift of 300,000 dollars. Would he have to pay taxes on this money or would I?? We are both citizens and live in the United States..

    • Lil, please read the comments in the thread above carefully. I presume your boyfriend has not used up his lifetime $5 million exlusions…

      So, the first $13,000 is tax free (that is, the first $13,000 that a person gives to another simply is tax free and doesn’t need to be reported to the IRS); the other $287,000 will have to be reported to the IRS (see Steve’s comment above), but will be subtracted from the $5 million dollar lifetime exclusion. Next year, your boyfriend could give you the same gift, with the same result = the first $13,000 is simply tax free, and the rest gets subtracted from what is left of the $5 million exclusion.. and so on until his $5 million is used up. Once that $5 million is used up… if he gave you that same gift… the first $13,000 is tax free (keep in mind, the IRS may raise that $13,000 annual amount in the future), but the rest would now be taxed to HIM, since his $5 exclusion is now gone.

      Now, does your boyfriend need a best friend?

  21. I have a couple questions about the gift tax. I recently won a cruise for two worth about $2,630 from a radio station. When I went to pick up some information from them they had me sign a tax form “request for taxpayer identification number and certification.”

    Does this mean that I would have to pay the tax on the gift or can I avoid it since the amount is under the $13,000?

    If I have to pay it what is the percentage on gift tax?

    Thank you

    • Cait, Amber is right. You were asked to give your taxpayer ID number so that the company how gave you the prize can give you a 1099 form at the end of the year, showing how much you need to include as “Other Income” on your tax return. When you get the form, make sure you didn’t pay tax on the gift already (if you did, it would be shown on the form); if you did pay tax, make sure you include the amount you paid as an amount “paid in” when you do your tax return (just like you show the amount withheld from your paycheck as an amount that you’ve already “paid in”.

      • Hmmm, my comment should be below Caits, below. Please read her’s first.

      • Thank You!

        • Your welcome. And, please excuse the goofs in my messages. “How” should be “who”, and I meant to say, “make sure you didn’t pay tax on the PRIZE (not gift..grrr) already”. I’ve been speaking English for almost 41 years and still haven’t mastered it!

  22. Cait —

    That is not a gift, it is a prize. You will be taxed on the entire amount (it will be included in your income) and you will receive a 1099 form at the end of the year.

    Amber

    • O ok thank you for the clarification! Income tax is significantly less than gift tax right? so that sounds good to me!

  23. My dad would like to gift me $80k so that I may invest it. He has never gifted before. From the above, $13k would not be recorded as taxable, but the remaining $67k would be deducted from the $5,000k lifetime exemption and thus would not be taxable either. Am I correct in saying this? Or would he have to pay taxes on the $67k? I understand that my mother could gift me half and each of them would then deduct $27k from their individual $5,000k lifetime exemption. But again, what taxes would have to be paid?

    • Ding ding, you are correct. Your dad would report the remaining $67k, but not pay tax on it (presuming he still has more than $67k left of his $5M exlusion). And, your math is correct if each parent gives you half. No taxes paid until the $5m exlusion is used up, each.

      If they wanted to lower the reported amount… they could each give you $13k on 12/31/xx, and then another $13k on 1/1/xx the next day. Or, if you are married, they could each give you and your wife $13k… etc.

      Now, I really want to know… how do I get parents and friends like the ones mentioned in these posts?!

  24. If friends give me $100 each without asking for anything back do I have to pay tax on it?

    If friends give me $100 each as an interest free loan to be repaid in 10 years do I have to pay tax on it.

    Are either of theses scenarios considered as taxable income?

    • Joseph, a gift to you is not taxable income. If so, every grandmother who gave her grandchild a $100 gift would subject the grandchild to tax. Neither of your scenarios are taxable.

      If you win money, it is taxable. If you find a bag of money, technically it is taxable to you. But, if someone just gives you a gift of money, you don’t owe tax on it.

  25. If my parents change the name on their camp deed over to me and my 2 sisters are they responsible for paying gift tax on the value of the camp?

    • Hi Kay. You really need to get with a CPA on this one. If/How this is taxed to your parents will depend on how the gift is given to you and your sisters (read through the discussions above and you will see why… annual exclusions, lifetime exclusions, etc.). The value of the property will be important to your parents for taxes now, and to you and your sisters later, because if you sell that land that you received as a gift, you may be taxed on any gain you realize above the basis of the land. Fair Market Value is what you need to know, and how it will be split between you and your sisters. This is too big a question for this forum. Hope that helps.

  26. I inherited my father’s life insurance of approximately $1 million. If I understand correctly, life insurance is not taxed. And, if I share this with my four other siblings (approximately $200k each), they wouldn’t get taxed for receiving the gift, but I would have to report it on my taxes for giving it to them. Although, if it falls under the lifetime exclusion (which it would), I wouldn’t be taxed on it? Thoughts??

    • I would recommend a CPA here as well. Generally, if you get a lump sum life insurance payment because someone died, it is not taxable and doesn’t have to be reported as income. If you got a policy transferred to you in exchange for cosideration (something you give/paid), then it is a different story. The second issue, if you now have $1 million in cash you want to share (read, give) to your sisters, read the thread above. Depending on how much you give them, how fast will determine if it is reportable (that is, giving one person more than $13,000 in a year will make any amount above that $13,000 reportable that year). But, if you still have enough of your lifetime $5 million dollar exclusion to cover the gifts to your sisters, you would not owe tax on the gifts (but again, who much you give in a year will determine if it is REPORTABLE or not, even if you won’t owe tax on it. Okay?

      • “Consideration”, not “cosideration” English. Learning to use it for 41 years.

  27. My Great Aunt recently died she left over $100,000 in a bank account with the will stating that it gets shared between the Nieces now is it that each niece will have to pay taxes on that money or can My Aunt who is Executor of the will gift $13,000 to each neice in the year 2011 then when 2012 comes whatever is left she can divide that up and gift the rest to the nieces? Thanks

    • Inheritance taxes and estate taxes are not my specialty. And, these two taxes differ. I think I know the answer to your question, and have enough smarts and experience to figure it out, but you need someone who KNOWS the answers, not someone like me who just thinks he is right. I would really recommend a CPA with estate tax experience; that shouldn’t be hard to find. Sorry to not answer your question, but you need facts, not supposition on my part. Good luck.

    • Also, forgot to mention… states differ in their treatment of inheritance taxes and estate taxes. So, another good reason to consult a CPA near you, so you can get the correct info for your state. Cheers.

  28. Oh an sorry I thought about this after I hit send…. If My mother gifted me $13,000 and 3 yrs later she had to go into a nursing home does this fall under the 5 yr thing? You have to have things out of your name for at least 5 yrs or can the nursing home come back on me and say your mom is out of money and before Medicad/Care whichever one picks up after all your money is gone kicks in will I have to give her back the $13,000.00?

  29. If I receive a $20 000 cash as a gift from my parent from overseas and deposit it in US, do I have to claim the gift with IRS? Is it better to have bank transfer than cash?

  30. Charles says:

    My father gave me about $40,00 as a gift this year. Then we realize that part of this will be taxed, so he will take $30,000 back. Will I have to pay tax then?

    • Charles, please read the above thread. $13,000 given by your father to you in one year is not taxable and does not have to be reported to the IRS. If he gives you more than $13,000 in a year, that “more” is reportable (by your dad) on Form 709. Reportable is not the same as taxable. Everyone has a $5 million lifetime exclusion, so that “more” will be subtracted from your dad’s $5 million (if he hasn’t used it up already). So, he will report it, but not pay tax on it. Now, say your dad used up all of his lifetime exclusion before this year, and he gives you $13,000 this year… still not taxable, because anyone can give $13,000 a year without it being taxed or reported. But, if dad has used up his exclusion before this year, and gives you $13,001 this year, then your dad will have to pay tax on the $1. Make sense? YOU wouldn’t pay tax on a gift given to you in any event. The gift tax is payed by the giver. Okay?

  31. claire095 says:

    Hi, I’ve read your answers re international gifts, but just to make clear. I’m from Russia and want to make a money present to my friend in USA (a resident). If i transfer amount let’s say 3 000 $ to her bank account she won’t need to pay any taxes- right? And I can make that gifts like multiple times per year but total shouldn’t exceed 13K- right? Do i need to attach some kind of gift contract with transaction or no papers are necessary? thanks in advance

  32. Got a tough one here::: My uncle has received a large lump sum payout from his reverse mortgage . My daughter has been caring for my uncle for quite sometime and he has decided to give her a generous cash sum of 85 K transferred to her savings account . Because lump sum my uncle received is not taxable income, he didn’t have to pay any taxes. Will my daughter have to pay taxes on 85 K she received?.

    I must mention my daughter is 18 years old and I file her as dependant on my tax return. Do I have to report to IRS and pay taxes ? on 85K she received..

    Thanks
    Darren

  33. Darren, on the face… with the facts you state, that doesn’t seem tough at all. Someone who had some money (for whatever reason), gave $85K to another person as a gift. All previous responses that would apply in this thread would apply here. The person who get a gift is not taxed. The person who gives a gift in taxed when (1) they give more than $13K per year, AND AND AND (2) they have used up all of their lifetime gift exemption. Gifts above $13K can be reported on the form I mention previously in the thread, but reported does not mean taxed. The IRS wants to know when people get large gifts, but tax is only “charged” on gifts when they …. (1) and (2) above. Now, if the uncle died and gave the money from an estate or left the money in trust… those questions are outside my experience. I THINK I know the answers, and am smart enough to figure out if I am correct, but if estates/trusts are part of your question, you need someone (a CPA or estate planner) who KNOWS, not just thinks they know (like me). Hope this is helpful. Cheers.

    • Darren, I should also mention for those who might read this later (and for you), my answer above would change if your daughter was a minor, either under 18 or under 14. But, since she is 18, my answer stands for Federal tax. Some states may have rules for gifts to minors or children/people under 21 (rather than 18). A CPA in your state would be able to tell you if that is an issue for you.

  34. if my boyfriend is rich n he has been giving me alot of $ and i save up for a car, then go pay $15000.00 down on a 30k car: do i need to worry about irs if i dont work alot?

    • Um, Becky, I am having a little trouble understanding your question… I will attempt an answer. You don’t have to pay tax on money your boyfriend gives you. He would have to pay tax on a gift to you that is more than $13,000 in a single year IF IF IF IF he has already used up his lifetime gift tax exclusion (read the thread above). If he still has enough gift tax exclusion, he can give you $13,001 in a year, not pay tax on the first $13,000, then report (but exlude) the last $1 on his tax return for the year. For the last part of your question, it will depend on whether you are listed as a dependent on someone else’s return. If you are not a dependent, are under 65 and SINGLE I will say this, you must file a tax return if you have gross income of $9,350 or more. Read this: http://www.ehow.com/info_7975927_much-income-before-file-taxes.html and this: http://www.forbes.com/2011/01/25/when-file-first-tax-return-dependents-personal-finance-first-1040.html.