The Internal Revenue Service never requires recipients to pay tax on gifts received. However, you may pay any gift tax on behalf of the giver if you choose to do so. Also, you may owe taxes on subsequent amounts earned from a gift, such as dividends, interest revenue and capital gains.
Tax on Gifts Received
When someone gives you cash or another asset and doesn't expect goods or services in return, the IRS considers it to be a gift. In general, you don't have to pay tax on any gifts you receive. The gift tax, if any, is the responsibility of the giver. If the giver does owe tax on the gift and you want to pay for it, you may make a special arrangement with a tax professional to pay the tax instead.
The Gift Tax
Most people won't ever owe taxes on gifts. That's because the IRS allows individuals a lifetime exclusion of $5.43 million before they have to pay tax on gifts given. On top of that, individuals can give up to $14,000 per recipient, per year, without dipping into their $5.43 million exclusion. This exclusion is per person, so a husband and wife can give $28,000 to each recipient without tax implications. Also, gifts to spouses and payments made directly for medical expenses and tuition are never taxed.
Paying the Gift Tax
If the giver does owe tax and you want to pay it on his behalf, you can report the gift on Form 709. The taxpayer should include copies of any appraisals or documentation of the transfer with Form 709. The taxable value of the gift is the fair market value of the cash or asset less any gift tax exclusions. For example, say the giver has exhausted her annual exclusion and gives you $16,000. $2,000 --the excess of the annual gift over $14,000-- is taxable.
Tax on Dividends, Interest and Capital Gains
If someone gives you the gift of stock or securities, you won't have to pay taxes when you first receive them, but you will have to pay taxes on any dividends you later receive. Dividends will be reported on an annual Form 1099-DIV. Likewise, you'll owe tax on any interest earned on investments, which appears on Form 1099-INT. If and when you sell gifted stock for a gain, you will be responsible for any capital gains tax.
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