Receiving gifts from parents is a nice way to be acknowledged and appreciated, but it can also come with some unforeseen tax implications. When receiving financial or non-monetary gifts, such as investments or real estate, you'll want to know the facts about potential taxes that may apply so you can offset any unexpected costs when filing your income taxes. We’ll cover everything from taxable gifts vs. nontaxable gifts to gift rules for each different type of asset in this article.
What is Considered a Gift and How it is Taxed?
A gift is anything of value that’s transferred from one person to another without receiving any kind of compensation or services in return. The Internal Revenue Service (IRS) considers gifts as a taxable income, and the recipient may be required to pay taxes on them. Gifts are either considered “taxable” or “non-taxable” depending on the type and amount of the asset being gifted.
Non-Taxable Gifts:
Gifts that do not have to be reported or taxed include: Tuition payments, Education expenses, Medical expenses paid directly to the provider, Any amounts you give someone in exchange for something they sell you at fair market value, and Monetary gifts up to $14,000 per year per individual donor.
Taxable Gifts:
Gifts that are reportable or taxable include: Monetary gifts in excess of $14,000 per year per individual donor, Real estate (land and buildings), Jewelry, Cars, Boats, Life insurance policy proceeds, Stocks and bonds.
Gift Rules for Different Types of Assets:
When it comes to gifting assets such as real estate or life insurance policy proceeds the rules can be a bit more complex than when gifting money. Here is a quick breakdown of the gift tax rules for each type of asset:
- Real Estate – If you’re giving away real estate that has appreciated in value you’ll be required to pay a gift tax on any appreciation that has taken place since you acquired the property.
- Life Insurance – If you’re gifting a life insurance policy, any money your beneficiary receives upon your death will not be subject to gift taxes. However, if you give away a life insurance policy before your death, then it is considered a taxable gift and must be reported to the IRS.
- Stocks and Bonds – Any stocks or bonds that are transferred as gifts may be subject to capital gains tax if they have appreciated in value since being purchased. The recipient of the stocks or bonds is responsible for paying any applicable taxes on them.
Exclusion Amounts for Gifts Received from Parents:
In some cases, if the gift is being received from a parent and the amount falls within certain tax exclusion amounts, it may be exempt from taxation. The exclusion amount for gifts received from parents in 2019 and 2020 is $15,000 per person, per year. This means that if your parents give you more than $15,000 worth of financial or non-monetary gifts during one calendar year then they will have to pay taxes on any amount over that limit.
What is tax on financial gifts from parents?
Any financial gifts from parents that exceed the annual exclusion amount of $15,000 (in 2019 and 2020) are subject to gift tax. The gift giver is responsible for paying any applicable taxes on the gift, though different rules apply if you’re gifting certain types of assets such as stocks or life insurance policies.
Reporting Requirements for Gifting Money or Property to Children:
Gifting money or property to children is a great way to provide financial security and assistance for their future. However, if the amount is over the annual exclusion limit of $15,000 per person, then it’s important to remember to report the gift in accordance with IRS regulations. Parents must report any taxable gifts given to their children on Form 709 (United States Gift Tax Return). This form must be submitted along with any applicable taxes due when you file your taxes each year.
Strategies to Minimize the Tax Burden on Gifts Received from Parents:
Gifting money or assets to your children has its benefits, but it can also come with some heavy tax implications. To help minimize the burden, consider utilizing strategies such as setting up trusts and annuities that allow you to pass on wealth without incurring any taxes. You may also want to take advantage of the $15,000 annual exclusion limit so you’re only paying taxes on amounts over that threshold.
Tips for Planning Ahead with Estate and Gift Taxes in Mind:
When planning your estate and gifting strategies you should always keep taxes in mind. It’s important to
- understand the tax implications of any gifts you give or receive so you can avoid any unexpected surprises when filing taxes.
- It’s a good idea to consult with a financial advisor who can help you identify the best strategies for minimizing your tax burden while still helping secure your children’s financial future.
Conclusion:
Receiving gifts from your parents is a nice way to show that they care, but it’s important to understand the potential tax implications of the gift. It’s a good idea to consult with a financial advisor or tax professional to ensure you have an understanding of the applicable taxes and strategies for minimizing them so you can avoid any unwelcome surprises when filing your taxes. With proper planning and preparation, gifting money or assets to your children can be a great way to provide financial security and assistance for their future.
FAQs:
Q: What is considered a gift?
A: A gift is anything of value that’s transferred from one person to another without receiving any kind of compensation or services in return.
Q: Are gifts taxable?
A: It depends on the type and amount of asset being gifted. Some gifts are non-taxable, such as tuition payments, medical expenses paid directly to the provider, and monetary gifts up to $14,000 per year per individual donor. Other types of assets may be subject to tax if they have appreciated in value since being acquired or given away.
