Taxes on Monetary Gifts

Gifts that exceed $13,000 must be reported on the giver's tax returns.

The gift tax may make it seem as if the Internal Revenue Service has a thing against generosity, but gift tax regulations are implemented largely to keep parties from giving their assets to others shortly before their death in order to avoid estate taxes. Unless it's arranged otherwise, the gift giver, not the recipient, is responsible for taxes associated with the monetary gift. Because of yearly and lifetime gift-giving exemptions, most taxpayers can avoid paying taxes on gifts if they plan correctly.

Gift Tax Basics

If you receive a gift, no matter what the amount, you are not liable to pay gift taxes unless you arranged with the gift-giver beforehand to cover associated taxes. If you're giving a monetary gift, you may be liable for gift taxes if the amount you provide is greater than the amount exempted each year by the IRS -- $13,000 as of tax year 2011 -- and are only liable for amounts that exceed the exempted amount. For example, if you give your grandson $15,000 in 2011, you'll be liable to pay taxes on the $2,000 that exceeds the exemption.

Annual Exemption

The $13,000 gift-tax exemption applies to each recipient, and not directly to the giver. Additionally, married couples' exempted amount is $26,000 as of 2011. Because of this, gift givers may give an unlimited amount to multiple parties without incurring a tax liability, so long as each gift doesn't exceed exempted amounts.

For example, as a married couple, Mr. and Mrs. Smith's combined exempted amount is $26,000. They give $25,000 to each of their three of their children in 2011, and provide the youngest an additional $5,000 as a wedding gift. The gift amounts to the two older children don't exceed the exempted amount, so the Smiths aren't liable for taxes. The $30,000 total given to the youngest child exceeds the exemption by $4,000, the total the Smiths must pay gift tax amounts on.

Lifetime Exemption

In addition to the $13,000 per year, per person exemption, the IRS also allows gift givers a lifetime exempted amount of $5 million. Taxpayers may choose to use this exemption any time a gift exceeds an amount covered by an annual exemption. Continuing the example above, the Smiths may choose to claim the excess $4,000 gifted to the youngest child as part of their lifetime exemption in order to avoid taxation on the amount. The decision reduces the Smiths' remaining lifetime exemption to $4,996,000. Once a gift giver reaches the limits of her lifetime exemption, all gifts that exceed annual exempted amounts will be taxed.

Gifts or Compensation?

The IRS requires all money transferred between an employer and employee to be reported as income, whether it's regular payroll, a year-end bonus or a holiday gift. Because of this, cash gifts made to employees aren't covered by the $13,000 exemption rule, and must be reported as income to the IRS, with payroll taxes levied for the amount levied against the gifted amount.

References

• Internal Revenue Service: Publication 950 -- Introduction to Estate and Gift Taxes
• Internal Revenue Service: Frequently Asked Questions on Gift Taxes
• SmartMoney; How the $13,00 Gift-Tax Exemption Works; Laura Saunders; February 2011
• Fairmark; Tax Rules for Gifts; Kaye A. Thomas
• Law.com; Holiday Gifts for Employees May Be Followed by the Tax Man; Kelly Phillips Erb; November 2008