Do I have to report cash gifts to the IRS?
Giving or receiving gifts can affect the bottom line on your tax returnYou just received $10,000 from a favorite Aunt. Or your parents want to help you with the down payment on that first house. Or maybe you're the giver, helping a friend start a business or pay off a debt.
When tax time rolls around you may be wondering do I have to report cash gifts to the IRS. Although this article can't substitute for legal tax advice, there are a few basic guidelines for receiving (or giving) significant cash gifts among friends, family members or others.
What is a gift?
A gift is anything of value, including but not limited to money which is given to another person, charity or organization without hope or expectation of reward, repayment or receipt of anything of similar value. For instance, if you give your sister and brother-in-law $10,000 towards the purchase of a business, and arrange to receive a percentage of the profits, it is an investment rather than a gift, even though you do not expect repayment of the initial amount in a given time frame. If you give art valued at $100,000 to your mother so that she can sell it and buy a new home, your art was a gift even though she has converted it into something of equal value. You have not personally benefited in a monetary sense.
General exclusions from gift taxes, regardless of amount
Tuition, educational fees or medical expenses that you pay directly to a medical provider, care facility, school, college or other educational provider for the benefit of another person. This money must be paid directly to the provider to meet the exclusion requirements.
Gifts to your spouse for any purpose
Gifts to a political organization for its use
Gifts to recognized charities.
In addition, any cash or other gift of value that does not exceed the annual exclusion is does not affect your taxes. The only exception to this involves future interest payments, which triggers a new set of rules beyond the scope of this article.
If you receive a cash gift:
If you receive a cash gift of less than $12,000 from any one person, you will not owe taxes on that gift. This applies even if you receive multiple gifts below the threshold.
In general, even gifts received over the threshold will not trigger gift taxes for the recipient. The donor is responsible for all taxes owed. The only exceptions are:
Gifts from certain foreign sources
Gifts in which an arrangement is made for the recipient to pay the taxes
These rules apply only to Federal taxes. Some states do tax cash and other gifts as income, so be sure to check with a local tax professional for details about your area.
If you give a cash gift:
As of in 2007, with few exceptions, you can give up to $12,000 each to any number of people and none of the gifts will be taxable, nor will you have to file a 709 Gift Tax form. If you're married, you and your partner can each give up to $12,000 to the same person in 2007 without making the gift taxable. If your gift is over the $12,000 annual exclusion, you will have to file a Gift Tax form, but the gift itself may still be excluded from taxes. (There is an additional tool called Gift Splitting which may protect larger gifts from married couples. Consult your tax professional for information about this tool, and whether your gift qualifies.)
If your gift exceeds the $12,000 annual exclusion, you will have to file a form 709 to determine if the Unified Gift Credit protects your gift from taxation. As of 2007, the unified lifetime credit for gifts was $345,800. That means up to $345,800 in taxes otherwise owed for gifts is exempt from payment. This is a lifetime, and not an annual amount once that credit is used in full, gift taxes over the annual exclusion will result in tax liabilities.
The answer to the question do I have to report cash gifts to the IRS is complex. While this information is a good start, you should consult a tax attorney to determine the implications of your gift.