Is Cash From Parents Considered Taxable Income?

Even after you leave the home, your parents may still give you cash from time to time. After the immediate relief of your newly full wallet wears off, you might be wondering whether Uncle Sam wants a share of the money. Whether it's taxable or not depends on the reason for the payments.

A gift you receive from your parents, even if it's cash, won't count as taxable income on your tax return. Your parents already paid taxes on it as income, so you're not taxed on the money a second time. However, if you take that money and invest it, any returns on those investments, such as interest or dividends, will increase your taxable income. For example, say you take the money and put it in a savings account. Any interest you earn will count as taxable income.

On the other hand, if your parents are paying you for work you've done for them, that's not a gift -- it's wages. For example, say you have younger siblings. If you babysit them and your parents pay you $100, that counts as $100 of taxable income that you're expected to report on your taxes. However, if you're under 21 and a household employee working for your parents, you don't have to pay Social Security or Medicare taxes on the income. Household employees include babysitters and gardeners, but not repairmen or contractors.

Though you might not be on the hook for income taxes on cash gifts from your parents, your parents could owe gift taxes. As of 2013, the annual per donee exemption is $14,000, which means that each parent can give you up to $14,000 gift tax-free -- or $28,000 for both your parents. Any gifts in excess of that amount are taxable gifts. For example, if your parents give you $30,000 in cash, the last $2,000 counts as a taxable gift.

But, your parents still might not have to pay anything to Uncle Sam yet. Every person has a unified credit to use for both taxable gifts and passing on their estate. As of 2013, the credit allows you to give $5,250,000 over your life, and after your death through your estate, without gift taxes or estate taxes. For example, say your dad gives you $2,000 over the annual exclusion. If he hasn't used any of his unified credit, he won't owe any gift taxes, but his exemption will drop by $2,000.