Surprise! Mom and Dad gave you a hefty cash gift for your birthday, a graduation present, or just because they like you. But you wonder: is gift money taxable income? In most cases, no.
There are some situations in which gifts are taxable, but they’re pretty rare. And it’s the person giving the gift who pays taxes on it.
What is considered a gift?
As far as the Internal Revenue Service is concerned, a gift is any transfer of property where the recipient receives nothing (or less than the property’s full value) in return. That can include cash gifts as well as real estate, investments, interest in a business, and anything else with value.
So Grandma gives you a car and doesn’t expect you to pay her for it? That’s a gift. Your parents give you a percentage of the family business when you turn 21 — that’s a gift. Great Uncle Henry sends you a birthday card and a check for $500? That’s a gift, too.
As long as the fair market value of the property is less than $16,000, neither you nor the gift giver need to worry about gift taxes. That’s the annual gift tax exclusion for 2022. That annual exclusion amount doubles to $32,000 when a married couple gives a gift — each spouse can give $16,000 per recipient per calendar year without it counting as a taxable gift.
Who pays the gift tax?
If the value of a gift exceeds $16,000 to any person during the year, the giver — not the recipient — has to report it on a gift tax return (Form 709).
But that doesn’t necessarily mean they’ll owe gift tax. It just starts eating into the giver’s lifetime gift and estate tax exemption.
What’s the lifetime exclusion?
The lifetime gift tax exemption is the amount of money or assets the federal government allows taxpayers to give away over their lifetime without paying the federal gift tax.
The lifetime exclusion amount is adjusted annually, but for 2022, it’s $12.06 million.
Let’s look at an example to see how this works in practice. Let’s say Grandma gives you a car worth $20,000. The car’s value exceeds the $16,000 annual exclusion amount, so Grandma must file a gift tax return.
The good news for Grandma is that she’s never had to file a gift tax return before, so her lifetime exclusion is untouched. She simply files Form 709 with the IRS to report the gift. Grandma can still give away $12.06 million without paying taxes on any gifts.
On the other hand, what if Grandma’s been very generous and has already maxed out her lifetime gift tax exclusion? In that case, she still needs to file Form 709, but she’ll also have to pay gift taxes on $4,000 — the difference between the annual gift exclusion ($16,000) and the value of the car ($20,000).
What is the gift tax rate?
Federal gift tax rates range from 18% to 40%. The higher the value of the gift above the annual limit, the higher the rate. You can find a breakdown of the rates in the IRS Instructions for IRS Form 709.
But remember, the giver pays the gift tax — not the recipient. And the gift tax only kicks in once the giver has exhausted their lifetime exclusion amount.
Bottom line? When a loved one gives you a gift, enjoy it! You don’t have to worry about filing extra forms with your income tax return or paying taxes on that windfall. Just report your regular income as usual.
In the meantime, if you have any questions on whether or not gift money is taxable income, please reach out. We’d love to help!
Please reach out, we’d love to help!
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Countless assumes no liability for actions taken in reliance upon the information contained herein.