That occasional check from Mom and Dad can really help with the bills. But are there any tax consequences for their generosity? In general, no one has to pay taxes on annual gifts of less than $14,000. However, your parents will have to file a gift tax return and pay taxes on any excess gifts.
The Internal Revenue Service has a specific definition of what constitutes a gift for tax purposes. Gifts are transfers of assets in which the recipient doesn't give anything in return. Checks, money orders and cash are all clear examples of gifts. However, vehicles, residences and other physical assets also constitute gifts.
Payments made on your behalf may not necessarily be considered gifts. Tuition payments, college savings plans and medical expenses paid on behalf of another person aren't considered taxable gifts.
The Amount Matters
Financial gifts only have a tax implication if they cross a certain dollar threshold. For 2014 and 2015 tax returns, the annual gift tax exclusion is $14,000. If your parents gifted you less than $14,000 per person, you don't need to report the gift as income on your tax return.
The $14,000 exclusion applies to each individual separately. That means your parents can give you up to $28,000 as a couple in a year, and you won't have to worry about tax implications.
Reporting Relevant Gifts
If your parents' gift doesn't meet any of the IRS exclusions, a gift tax return must be filed. However, that burden falls on the gift-giver rather than the recipient. Your parents will need to file Form 709, Gift Tax Return, with their annual income tax return. Each parent will owe tax on the amount of financial gifts in excess of $14,000.
Your parents should include any documents regarding the gift transfer in their annual tax return. If they give you a physical asset, like a car or a house, they must also include a professional appraisal with the return.
It's critical that your parents understand the implication of their gifts on Medicaid eligibility. Unlike the IRS, Medicaid does not offer a $14,000 annual gift exclusion. If your parents transfer assets to you or give you a large gift right after applying for Medicaid, they can be ineligible for Medicaid for a specific period.
The length of the Medicaid exclusion is equal to the value of the gift divided by the average monthly cost of care in the state. For example, if your parent gives you $50,000 and the monthly cost of care in the area is $5,000 a month, he will be ineligible for 10 months. Your parents can avoid this penalty by holding off on gifts for at least five years after their initial Medicaid applications.
- David Woolley/Photodisc/Getty Images