When Does the Receiver Have to Pay Gift Tax?
The Internal Revenue Service’s gift tax rules are complicated and often in a state of flux. However, they usually have a happy ending for people who receive gifts. Paying taxes is usually the responsibility of the gift giver and, as long as he takes care of the taxes, the gift is tax-free. Furthermore, thanks to the IRS’s exclusions and exemptions, many gifts are tax-free for the giver as well.
Gift Tax Basics
As of 2013, the gift tax rate was as high as 40 percent of the value of gifts that are subject to the tax. However, the IRS gives givers two different exemptions from the gift tax. First, a gift giver is allowed to give up to $14,000 per year (for the 2013 and 2014 tax years) in gifts to as many people as he wants, completely tax free.
Next, you get a lifetime exclusion – up to $5.34 million as of 2014. Only when you’ve given more than $14,000 do you have to start paying gift taxes.
Paying Gift Taxes
When a giver gives more than the exclusion, he has to file Form 709 with the IRS to report the gift for the tax year when the gift was given. He can either offset its value by using up part of his lifetime exemption or, if he has no exemption left, he can pay the gift taxes.
If the person who gives you a gift doesn’t pay the taxes that are due on it, the IRS can attempt to collect the taxes from you. The IRS has a wide range of collection actions, which can include eventually placing a tax lien against you, although this usually happens only after it has contacted you and tried to find another solution. Tax liens are to be avoided as they can appear on your credit report and damage your ability to borrow money.
Taxes after Receipt
Once a gift becomes yours, you become responsible for any future taxes that come due because of it. For instance, if your mother gives you shares of stock that pay dividends, you would pay taxes on those dividends as if you had bought the stock yourself. When you sell the stock, you will also have to pay taxes on any profit that you earn.
Whether it’s using your refund to pay off debt or avoiding tax liens to keep your score stable, learning how to manage your finances, especially how to handle your taxes, is an important step toward reaching your financial goals.
About the Author
Solomon Poretsky has been a writer since 1996, with experience in the fields of financial services, real estate and technology. Poretsky holds a Bachelor of Arts in political science from Columbia University.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc., an Experian company. © 2014 ConsumerInfo.com, Inc. All rights reserved.