Section 102 of the Internal Revenue Code sets forth the federal government's income tax laws for gifts and inheritances. According to Section 102(a) of the Internal Revenue Code, gross income does not include the value of gifts or inheritances. The Internal Revenue Code treats a gift exchange as a neutral event in limited circumstances. As such, neither taxpayer-donors nor taxpayer-donees pay taxes on their qualified gifts.
Basics of Income Taxation
Generally, the Internal Revenue Service requires taxpayers to pay income taxes on earnings, investment profits, fringe benefits, retirement benefits, tips, commissions, rents, royalties, bonuses and any other thing of value, unless the Internal Revenue Code provides them with an exception to the general rule.
As an exception to the general tax rule that taxpayers pay income taxes on the value of property they receive or on their cash receipts, the IRS treats gifts and inheritances differently.
Estate Tax Laws
Commonly referred to as a "death tax," the Internal Revenue Code places the income tax responsibilities on estates and not on beneficiaries. As such, an estate is responsible for paying income taxes on a decedent's personal and real property. The IRS requires estate administrators or executors to file tax forms on the taxpayer's behalf and on the estate's behalf.
The estate property includes all property owned by the decedent at the time of his death. However, Congress enacted the estate exclusion laws allowing estates to exclude up to the threshold annual tax amount for its property transfers. For 2022, estates are generally not liable for paying income taxes if their total estates are valued at less than $12.06 million.
Read More: How Does Estate Tax Work?
Gift Tax Laws
For 2021, the gift limit was $15,000 per donee per year. If a taxpayer gave a gift exceeding $15,000 to a donee in 2021, she was required to pay taxes on her gift; however, the donee is not required to pay gift taxes. If her gift is $15,000 or less, neither she nor the donee will pay taxes on the gift transfer. The gift tax limit is $16,000 in 2022.
Furthermore, the Internal Revenue Code contains yet another exception to the general tax rule that gifts exceeding $15,000 ($16,000 in 2022) per donee per tax year are taxable. Taxpayers can give unlimited gifts covering educational and medical costs, but the IRS limits the methods of transfer in some cases, and taxpayers may have to give these gifts directly to schools to cover tuition.
Tax Code 102 Limitations
Although Code Section 102(a) allows taxpayers to exclude the value of their gifts or inheritances from their income tax returns, they are subject to federal income taxes if they sell their gifts. However, the Internal Revenue Code allows donees to "step-up" or increase their taxable property basis on the value of their gifts in limited circumstances.
Things to Consider
Because tax laws can frequently change, do not use this information as a substitute for legal advice. Seek advice through an attorney licensed to practice law in your state. Also check with the Internal Revenue Service, at irs.gov, for the latest on tax regulations and filing procedures.
Jill Stimson has worked in various property management positions in Maryland and Delaware. Stimson worked for the top three property management companies in the commercial industry and focuses her career on property building logistics and tenant relationships. She holds a Juris Doctor and a Bachelor of Science in psychology.