Do monetary gifts count as income? And is a cash gift taxable? Those are valid questions, especially if you are looking forward to receiving gifts or have already received them.
If someone gives you a large cash gift, there’s good news on two fronts: First, there’s the gift itself, and second is the fact that you probably will not owe any taxes on it. The IRS tends not to consider cash gifts taxable for the recipient.
Of course, there are caveats that may apply to some gift money tax, but for the most part, just enjoy the money and thank the person who gave it to you. When it comes to cash gifts, it is the giver, not the receiver, who is responsible for paying taxes on the gift.
Annual Gift Tax Exclusions
In tax year 2021, any person may give another person up to $15,000 annually in gift income without incurring the gift tax. While most givers are parents or other relatives bestowing gifts on children or family members, that doesn’t mean a nonrelative can’t give you a generous gift that you won’t have to pay tax on.
And if the cash gift exceeds the annual giving limits, it’s the giver who is on the hook for paying taxes, not the recipient. The exclusion applies to people, not couples, so parents may decide to each give a child $15,000 and their happy offspring will benefit from $30,000 in nontaxable cash gifts.
In tax year 2022, the per-person gift tax exclusion rises to $16,000. Gifts made to individuals are not tax-deductible for the giver. Only gifts given to qualifying charitable organizations are tax-deductible.
Annual Limits on Gift Giving
Even with gift giving, there are boundaries you must stay within and rules you should follow.
First, if a person does give more than the annual limit to another individual, they must report their gift money tax to the IRS by submitting Form 709 - United States Gift (and Generation-Skipping Transfer) Tax Return with their federal income tax return. That doesn’t mean they will actually owe gift tax. Instead, giving more than the gift tax exclusion reduces the lifetime exemption amount.
In 2021, that is $11.7 million per person, which is also the amount of the federal estate tax exemption. This form is filed individually, not as married filing jointly. And a spouse who is a U.S. citizen can give you as much money as they like without incurring any gift taxes, and you can reciprocate.
For example, if you gave each of your two children $20,000 last year, that’s a total of $10,000 above the annual gift exclusion for two people. You will likely owe tax on the amount over the threshold, and the $10,000 is taken off your lifetime exemption, reducing it to $11,690,000.
That’s a little less money available to your kids when you die, if your estate is that large. Only the very wealthy and very generous have to worry about exceeding their lifetime exemptions. In fact, the lifetime giving limit will increase to $12.06 million in 2022. Even if someone is rich enough to be concerned about minimizing estate taxes, by giving amounts to loved ones over the annual exclusion they are, in effect, paying the tax, not the recipient.
Additional Exclusions and Conditions
As always, certain conditions may apply when it comes to taxes. For example, rather than giving you $10,000 outright, a relative gives you a $10,000 certificate of deposit. You won’t owe taxes on the $10,000 gift, but you do have to report any interest earned from the CD on your income tax return and you may owe taxes on that amount.
Reporting Foreign Gifts
If the gift comes from a foreign source, such as a relative who is not a U.S. citizen or legal U.S. resident, you will have to report the income if it is over $100,000.
That doesn’t mean you will pay taxes on it, but you must file Form 3520 - Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts and report the gift separately from your income tax form. Failure to file Form 3520 on time or accurately can result in penalties.
If you have given a gift and it requires IRS reporting as per federal guidelines, you can use IRS Form 709 to complete this process.
- IRS.Gov: Taxable and Nontaxable Income For use in preparing 2020 Returns
- IRS.Gov: What's New - Estate and Gift Tax
- IRS.Gov: Frequently Asked Questions on Gift Taxes
- IRS.Gov: Topic No. 506 Charitable Contributions
- IRS.Gov: Estate Tax
- JD Supra: IRS Announces Increased Gift and Estate Tax Exemption Amounts
- IRS.Gov: Large Gifts or Bequests from Foreign Persons
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including Sapling, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.