Is a Gift Subject to Income Tax?
Posted on Fri Mar 1, 2024, on Estate Planning
From Our “Ask a Question” Mailbag: “My mother gave me a cash gift early this year. Do I need to report this on my income tax return? Is a gift subject to income tax?”
Paige Zirrith, Estate Planning Attorney
Is a Gift Subject to Income Tax?
At the end of the year, it is not uncommon for people to give generous cash gifts to friends and family. Everyone is happy. Gift givers feel the warmth of generosity, and the recipients feel the joy of receiving a gift. Then comes tax season. Does the gift recipient have to report the gift as income and pay tax?
The good news is that the answer is no. Congress has written the tax code so gifts are NOT considered income for federal income tax purposes.
You are not obligated to report receiving a gift of money or anything else of value. The gift giver may have to file a gift tax return if the entire value of the gift to you exceeds the annual gift tax exclusion. For more information, follow this link to my article How Does the Annual Gift Tax Exclusion Work?
Is a Gift Deductable on my Income Tax Return?
No. While a gift to a charity might earn you a charitable deduction, cash gifts to friends and family have nothing to do with income, so do not appear on your gift tax return.
But, if your gift to another person exceeds the Annual Exclusion ($18,000.00 per person in 2024), you may have to file a Gift Tax Return. Further, if you happen to be one of those who give away more than your Gift Tax Exemption ($13.61M in 2024), you may have to pay Gift Tax.
What Gifts Are Not Taxable?
The Federal Gift tax was designed to stop the mega-wealthy from avoiding the Estate Tax by giving their wealth to their children during their lives. But, Congress did recognize that some gifts are nice and shouldn’t be discouraged. For this reason, paying the tuition for a person directly to the educational institution is not a taxable gift. The same goes for paying a person’s medical bills directly to the medical institution. Furthermore, gifts to your spouse are not taxed.
How Can I Make Gifts Without Triggering the Gift Tax?
The Federal Gift tax does not prevent you from being generous. Here are some popular ways people make gifts without triggering the Gift Tax:
- Take Advantage of the Annual Exclusion.
- Each year, you can give your children, grandchildren, friends, and even strangers up to the annual exclusion amount ($18,000.00 in 2024) tax-free. Further, these gifts do not require filing a gift tax return.
- Pay Education Expenses.
- If you pay the tuition directly to the educational institution, you owe no gift tax. This can be a very generous gift given the cost of private schools and universities. The recipient will be pleased, their parents ecstatic, and you will avoid Gift, Estate, and Inheritance Taxes.
- Pay Medical Expenses
- Like educational expenses, payments directly to the institution are not subject to gift tax. This can prove a much-appreciated gift that reduces your taxable estate in the right circumstances.
In Conclusion, Is a Gift Subject to Income Tax?
No! But there may be some Gift Tax issues for the Gift Giver.
I hope you found this short article answering the question: Is a Gift Subject to Income Tax? I have also included some links for more detailed information.
Contact us if you want to know more about estate planning or have questions about trusts. Let our Pennsylvania Estate Planning Lawyers and New Jersey Estate Planning Attorneys help walk you through what can be a confusing process. Feel free to contact our office for a free consultation.
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