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Taxes on a Gift: Do I Have to Pay Any?

Jane writes in to ask,

“I’m considering giving a large-ish gift to my son to help him purchase his first home. I think I understand that he won’t have to pay any tax on this gift, but I might have to. Is that correct? And how do I know if I have to pay any tax?”

Will the Recipient Have to Pay Any Tax?

The recipient of a gift does not pay any tax on that gift. Gifts are not included in taxable income, and the gift tax only applies to the person giving the gift, not to the person receiving it.

Will the Giver Have to Pay Any Tax?

The person giving the gift is subject to the gift tax, but, for a few reasons, there won’t actually be any tax owed in most cases.

First, none of the following types of transfers will result in taxable gifts:

  • Gifts to your spouse,
  • Gifts to a qualifying charity,
  • Gifts to a political organization for its use, and
  • Payments made directly to an educational institution or health care provider for somebody else’s tuition or medical expenses.

And for gifts that don’t fall under any of those exclusions, you can still give up to $13,000 per year to each recipient without the gift being taxable. (If you’re married filing jointly, you and your spouse can give a total of $26,000 per year to each recipient.)

In addition, even if you pass that $13,000 annual exclusion amount, you still have a long way to go before you actually have to pay any taxes. That’s because you also have a “unified credit” that exempts the first $5,000,000 of otherwise-taxable transfers that you make.

I say “transfers” rather than “gifts” because this credit is also the one that exempts your estate from estate tax when you die. So the more of it you use by giving gifts during your lifetime, the less of it you’ll have available to offset estate taxes for the benefit of your heirs. Still, for most people, $5,000,000 is plenty–more than enough to offset all the gifts they make during their lifetime as well as their entire estate.

Important note #1: Like tax brackets and many other aspects of our tax code, this $5,000,000 figure is something of a political football. It gets kicked around from year to year, so there’s no guarantee that it’ll still be set at $5,000,000–rather than at some lower number–at any particular point in the future.

Important note #2: If you exceed the annual $13,000 exclusion in any year, you do have to file a gift tax return (Form 709), even if you don’t have to pay any tax.

If you do end up exhausting your entire unified credit, the tax rates on the taxable amount of your transfer can be found in the instructions to Form 709.

How about an Example?

Raymond is an unmarried taxpayer. He’s never made any taxable gifts before. In 2011, he makes the following gifts:

  • $80,000 to the American Red Cross,
  • $10,000 to his nephew, and
  • $20,000 to his niece.

How much gift tax will Raymond have to pay? Zero.

  • Raymond’s gift to the Red Cross isn’t taxable because it’s a gift to a qualifying charitable organization.
  • Raymond’s gift to his nephew isn’t taxable because it’s less than the $13,000 annual per-recipient exclusion amount.
  • $7,000 (that is, $20,000 — $13,000 annual exclusion) of Raymond’s gift to his niece will be taxable. But Raymond will not have to pay any gift tax because of his $5,000,000 lifetime exclusion amount. After this year, his remaining exclusion amount will be $4,993,000 (or $5,000,000 — $7,000).

Note, however, that Raymond will have to file a gift tax return for the year because the gift to his niece exceeded the annual $13,000 exclusion.

Generation-Skipping Transfer Tax

If you make a gift to somebody two or more generations below you (e.g., your grandchild), the transfer could be subject to the generation-skipping transfer tax, which is a separate tax in addition to the gift tax. But, like the gift tax, it comes with a large lifetime exemption (currently $5,000,000) that you’d have to exhaust before owing any actual tax.

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Comments

  1. Would anything change if the gift is coming from overseas from parents (non us citizens) to their son/daughter? Does the receiver have to pay any taxes in the US?

  2. Hi Jay.

    My understanding is that, no, the recipient does not have to pay any tax. But, depending on the country from which the gift is coming and whether or not the US has a tax treaty with that country, the donor may have to pay tax on the gift.

    To be clear though, my knowledge of tax issues drops off sharply once international considerations come into play. So I’m not 100% certain about this.

  3. Thats ok. Thats good enough info.Thanks for your time.

  4. Iam little confused here..How is this gift tax different from the tax on the money you inherit? OR, are they treated the same?

  5. Jay,

    It sounds like you might be talking about a couple different things here. The estate tax and the gift tax are bundled into one combined system. But those are both taxes on the person giving (or leaving behind) the money/property–not on the person receiving it.

    There is no tax on money you inherit (exception being inherited IRAs, in which case the money is taxable as you take it out of the IRA) or on money that you receive as a gift.

    There are differences between receiving gifts and receiving an inheritance though.

    For example, if you inherit property other than money, your basis in the property will be its fair market value at the time of death (or, potentially, its fair market value 6 months after that, or at the time it’s distributed to you).

    In contrast, if you receive property as a gift, your basis in that property will be the original owner’s basis in the property (unless its fair market value at the time of the gift was less than the original owner’s basis, in which case things get a bit complicated).

  6. Anonymous says:

    “Would anything change if the gift is coming from overseas from parents (non us citizens) to their son/daughter? Does the receiver have to pay any taxes in the US?”

    If more that $100k the recipient needs to report the gift on IRS Form 3520. Possibly also on any state equivalent.

    And the blanket statement that gift or bequest recipients in the US never have a US tax liability is not universally true. There is at least one way in which the recipient of a bona-fide gift or bequest from outside the US is liable for US tax on the amount they receive:

    http://documents.jdsupra.com/cae3e407-8b2c-41d7-9307-ec4f052f53fb.pdf

  7. Mike,

    I am very impressed with this post. 90% of bloggers would have left it at the 13K, you brought up some advanced topics like Split gifting and using the Unified Exemption amount (with mentioning the 709 form!).

  8. Anonymous, thank you for sharing that information.

    Evan, thanks! :)

If you want to discuss this article, I recommend starting a conversation over at the Bogleheads investing forum.
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