When you receive a gift, the Internal Revenue Service doesn’t count that money as taxable income. However, just because the money won’t show up on your income tax return doesn’t mean there aren’t tax implications. In most cases, gift taxes are unlikely to be due because of the annual exclusion and the unified credit, but if the taxes are owed, the first obligation to pay them falls on the donor rather than the recipient.
Most circumstances do not require you to pay a tax on any gift of money received, as the giver is one responsible for the tax. If the giver does not pay the tax, however, you may be held liable for it.
Gift Taxes Paid By Donor
Under federal gift tax law, payment of any gift taxes is the responsibility of the donor, not the recipient. However, if the donor is unable to pay the taxes, the IRS can demand payment from the recipient, but only up to a maximum of the amount of the gift received. For example, if you have a rich relative who already has used her entire gift tax exemption and gives you $100,000 so that gift taxes are due, the rich relative is responsible for paying those taxes, not you. While it’s unlikely your rich relative would gift you $100,000, if that relative couldn’t pay the gift taxes, the IRS could come after you for those taxes.
Gift Tax Exclusion
The annual exclusion allows donors to give up to a certain amount each year to each person without triggering a taxable gift. As of 2018, you can give as much as $15,000 per recipient without the amount being taxable, which is up from the $14,000 annual exclusion in 2017. In addition, the unified credit allows each person to give away a certain amount during his or her life in excess of the annual exclusion and at their death before paying any gift or estate taxes. Under current law, the credit equates to $11.2 million in gifts per person, which means a person could give away $11.2 million during his or her lifetime before owing any gift taxes. As a result, it’s unlikely that any gift taxes would be due on the vast majority of gifts made.
Gifts of Non-Cash Assets
When you receive assets other than money, such as stocks or land, your basis for the gifted property is the same as the donor’s basis. Though you don’t pay taxes on any gains immediately, the basis will determine how much income that you pay taxes on when you sell the assets. For example, if a donor gives you stock she bought for $40 a share year five years ago, your basis is $40 a share. If you sell the stock for $60 a share, you must pay income taxes on $20 of income, but only after you sell the stock and realize the gain. This rule is different than if you inherit assets, which receive a step-up in basis to the full fair market value as of the decedent’s date of death.
- IRS.gov: Frequently Asked Questions on Gift Tax
- IRS: Collecting Estate and Gift Tax Accounts
- Legal Information Institute: 26 USC 1015
- Maxwell, Locke & Ritter: IRS Increases Annual Gift Tax Exclusion for 2018
- Forbes: IRS Announces 2018 Estate And Gift Tax Limits: $11.2 Million
- Internal Revenue Service. "Frequently Asked Questions on Gift Taxes." Accessed Jan. 14, 2020.
- Internal Revenue Service. "Frequently Asked Questions on Gift Taxes for Nonresidents not Citizens of the United States." Accessed Jan. 24, 2020.
- Internal Revenue Service. "What's New - Estate and Gift Tax." Accessed Jan. 5, 2020.
- Internal Revenue Service. "26 CFR 601.602: Tax forms and instructions." Accessed Jan. 13, 2020.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."