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Gifts don’t count as income

Q: My mother and father gave me a gift of $30,000 cash. Do I need to report this as income on my next tax return?

A: No, you don’t. Gifts are not considered income to the recipient, and you do not need to report the gift on your tax return. In fact, you really have no other obligation related to the cash gift other than to use the money wisely and thank your parents for their generosity.

Your parents, however, may have tax return filing obligations to address and maybe even have some tax to pay. The gift and estate tax system focuses exclusively on the donor, so here are the basics that affect your parents.

Each year, we are all allowed to give gifts totaling $13,000 to any person with no strings attached. This “annual gift exclusion” is an amount that can change based on the rate of inflation, but it has held steady at $13,000 for the past few years.

Since both your mother and father are entitled to give you $13,000 per year, a total of $26,000 of the cash they gave you is completely free of any gift reporting by them. If you are married, they could each make gifts of $13,000 to both you and your spouse so that the total amount of cash transferred would be $52,000 ($13,000 times four gifts). All of that without the need to report anything to the IRS!

Any amount that they gift during any year in excess of the $13,000 exclusions, however, does create a tax return filing requirement. So in this case, the $30,000 gift is in excess of the combined $26,000 annual gift exclusion amount, and they will have a gift tax return filing obligation. Plus, if they gave you other gifts during the year, whether cash or non-cash, those gifts will need to be reported also.

The gifts are reported on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, which looks like a fairly simple four-page tax return, but is in reality packed with traps for the unwary. Be sure your parents, or whoever is helping them with the form, understand the rules before they mail it to the IRS!

Since the gift to you is $4,000 in excess of the annual exclusion amount ($30,000 total gift less the two $13,000 annual exclusions) your parents will both need to file a Form 709. But there is probably no tax to pay. In addition to the annual gift exclusion, we all have a “lifetime exemption.” This exemption applies at death against the estate tax, but it can also be used against any lifetime gifts that exceed the annual exclusion. Currently, the lifetime exemption is $5.12 million per person. So unless your parents each have previously made gifts that exceed $5.12 million, the $4,000 excess will simply “use up” some of the lifetime exemption, and slightly diminish the amount each has available against the estate tax.

Like the $13,000 annual gift exclusion, the lifetime exemption amount has changed over the years. It was $1 million for many years before Congress raised it to $5 million in 2011. It reached the current level due to inflation in 2012, but unless Congress passes new legislation it will fall back to $1 million on Jan. 1, 2013. Wealthy individuals should be scrambling this year to do some major tax planning in case there is a partial or full rollback in the exemption.

Cash gifts are relatively simple. But the rules get more complex if generation-skipping gifts to grandchildren are involved, if gifts are being made to a trust or if property gifts are made where valuation is an issue. For wealthy families that don’t like the idea of paying taxes and having the government rather than the children inherit much of the family wealth, gift and estate planning is the most important tax planning they can do.

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To ensure compliance imposed by IRS Circular 230, any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation.

Peter Robbins is a partner in the Boise office of CliftonLarsonAllen, LLP specializing in tax matters for small businesses, individuals, and trusts and estates.

Have a question for Robbins? Email your question to news@idahobusinessreview.com. Enter “Talking Tax” in the subject line.

About Peter G. Robbins, CPA