Are monetary gifts taxable
Dear Len & Rosie,
Early this year, I gave my niece $19,000 to help her buy a car. She called me the other day and said she was told she has to pay income tax on this money. She also asked me for money to pay the tax. Is this true? Should I give her more money? Will she have to pay tax on that too?
David
Dear David,
Either your niece is uninformed, or she is fishing for more money from the Bank of Uncle David. She doesn’t have to pay income tax on a gift or even an inheritance unless it’s tax-deferred money, such as the accrued interest in a US Savings Bond, or a tax-deferred retirement account inherited upon your death. However, in theory you could have to pay federal Gift Tax for having made the gift.
The Gift Tax and the Federal Estate Tax are related. In fact they are the same tax, called the Federal Gift & Estate Tax. This is a tax on both gifts you make during your lifetime and on what you own upon your death. The good news is that you, and most people, do not have to be concerned about Gift & Estate Tax for two reasons.
First, there’s an annual Gift Tax Exclusion in the amount of $16,000 for 2022 (up from $15,000 in 2021). This exemption allows to give away $16,000 to as many people as you want, each and every year, and neither you nor they will have to report the gift to the IRS. You could stand at the entrance to town and pass out $16,000 checks to everyone who enters. This would be entirely tax free, and would also boost tourism.
Because you gave your niece $19,000, you have exceeded the limit. This means you owe Gift Tax on $3,000. Fortunately you do not have to write a check to the IRS. Your gift tax liability will be “paid” by your Federal Gift & Estate Tax Unified Credit, which covers the Gift & Estate Tax on the first $12,060,000 you gift above the $16,000 annual Gift Tax exemption or own upon your death.
You are supposed to report this gift on IRS Form 709, attached to your Federal Income Tax Return. Then, your Unified Credit exemption will drop by $3,000 to only $12,057,000. Unless you are wealthier than that, relax and don’t worry about it.
Len & Rosie