Is Money Given as a Gift Taxable?
Many people wonder whether the recipient of a monetary gift is required to pay taxes on that money. The answer is generally no. From a U.S. tax perspective, the tax liability lies with the person giving the gift, not the person receiving it. However, there are specific rules and exceptions to this general rule, especially when it comes to gifts between U.S. citizens and foreign persons.
United States Tax Rules for Gifts
In the U.S., the recipient of a gift does not owe any taxes on the gifted money. The tax responsibility lies with the donor, who is responsible for paying any gift taxes that may be due. Each individual in the U.S. can give up to $13,000 per year to another individual without incurring any federal gift tax liability.
However, if the value of the gifts exceeds $13,000 in a single year, the donor may be subject to gift tax. In such cases, the donor can either pay the tax directly or use up some of their lifetime gift and estate tax exemption.
As of 2012, U.S. taxpayers could exclude up to $5.12 million from federal estate and gift taxes, reflecting a unified credit of $177,200. If Congress and the President do not take action, this exemption will revert to $1 million in 2013, with the gift tax rate increasing from 35% to 55%.
Given these conditions, some people may consider gifting away their estate in 2012 to take advantage of the higher exemption and lower tax rates. Alternatively, they might die in 2013 to benefit from the higher estate and gift tax exemption.
Gift Tax and Estate Tax Basics
Gift tax is paid by the person making the gift, not the recipient. The recipient of the gift does not need to report or pay taxes on the received money. However, the donor may still have to file a gift tax return and pay the tax if the gifted amount exceeds the allowable exemption.
In 2012, the first $13,000 given to any one individual is excluded from gift tax. This is known as the annual exclusion. Beyond this, the donor may use a credit, known as the unified credit, which allows them to claim a credit of up to $177,200 on their combined gift and estate tax due. This credit exempts $5.12 million in gifts.
The unified credit, however, is only available if the donor files a gift tax return using IRS Form 709. The credit can be used in the current year and any unused portion can be carried forward to future years to reduce the tax liability.
Special Rules for Gifts Between U.S. and Foreign Persons
Particular attention should be given to gifts given between U.S. citizens and foreign persons. The rules and regulations can be more complex in these cases, and there may be additional tax implications beyond the standard U.S. gift tax rules.
U.S. citizens and residents are subject to the gift tax on gifts they give to foreign persons. Additionally, there may be foreign laws that require reporting or taxation, which the donor should be aware of.
Conclusion
In summary, the person receiving a gift in the U.S. does not owe taxes on that gift. However, the person giving the gift may be subject to gift taxes if the value of the gift exceeds the annual or lifetime exemption. Understanding these rules and exemptions can help in making informed decisions about gift giving, especially during times of significant estate and gift tax changes.