Recipient Of A Gift
Recipient Of A Gift - Cash is king, but you may have to tell the IRS if you give or receive it. The person making the gift must pay the tax, but thanks to the annual and lifetime exemptions, most people will never pay gift tax. For a cash gift to a relative, you need to know when and how to report the money to the IRS.
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Recipient Of A Gift
Depending on whether the cash is income or a gift, how much money changes hands, and whether you are the gift giver or recipient, there are different rules and reporting requirements. "It's not just about cash," said Nicole Rosen, a Wenatchee, Washington-based registered agent with Advisors Without Borders.
Gifts of property - such as cars - can fall under the same rules. "It could be cash in the eyes of the IRS," Rosen said. Here's a look at each rule and how it affects you: Cash gifts can be taxed at rates ranging from 18% to 40%, depending on the size of the gift.
The person making the gift must pay the tax, but thanks to the annual and lifetime exemptions, most people will never pay gift tax. In 2022, you can make gifts of up to $16,000 without any tax or reporting requirements. "I don't want anyone to fall in love with that fate," Rosen said.
Your Money Decisions
That number changes every year." In 2023, the annual exclusion limit increases to $17,000. This limit is per person, meaning that a couple can donate up to $32,000 to each of their children in one year, for example. "Giving cash to family members can be an important part of an overall estate plan," said Scott Sturgeon, senior wealth advisor and founder of Oread Wealth Partners in Leawood, Kansas.
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Making tax-free gifts of cash or even other assets to family members during your lifetime can be a great way to see your family members benefit from those gifts." Some cash gifts, such as gifts people give to pay for education or medical bills, are exempt from any tax.
However, to qualify for the exemption, you must make the gifts directly to the school or health care provider. If a person's gift exceeds the exclusion limit, they must complete IRS Form 709 to report the excess gift. But this does not mean they have to pay taxes.
It doesn't necessarily create a tax immediately," said Daniel Loggins, CPA and president of Financial Innovations in Southfield, Michigan. That's because in addition to the $16,000 annual exclusion, there is a $12.06 million deduction for life in the 2022 tax year. "The excess is the opposite of the exemption of life," said Laginess.
How Does The Federal Gift Tax Work?
Married couples filing joint tax returns may also be required to file Form 709 - even if their gifts are less than $16,000. For example, a husband and wife can each give $16,000 to their child, but must report $32,000 on IRS Form 709 so that the gift is properly divided between them.
Keep in mind that cash does not have to change hands to have a tax effect. For example, Laginess says, "If you're paying for the wedding, that will trigger a gift tax." Parents who spend more than the annual amount on a child's marital exclusion must fill out Form 709. Legins said, however, that he has never seen a taxpayer follow up with a taxpayer who failed to report the wedding expenses they paid to someone.
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other. When it comes to reporting gifts and paying any taxes, the burden falls on the person making the gift. The recipient does not have to do anything. Depending on what the recipient does with the gift, there may be future tax consequences, such as paying capital gains tax on the investment.
But someone who earns money—even more than the annual exclusion amount—doesn't have to worry about reporting it to the IRS. "For documentation purposes, it's important to keep records of all those transactions in the form of invoices and any accompanying tax files," Sturgeon said. Gift tax applies to cash and non-cash gifts.
Annual And Lifetime Allowances
If you receive a gift that is not cash, you may end up paying capital gains tax on a portion of its value, even if it is less than the gift tax exemption. For example, let's say someone offers you a stock worth $10,000, but they only paid $1,000 to buy it.
When you sell those shares, the capital gain is calculated based on the original purchase price. This value is known as the base. If you sell the stock for $10,000, you will pay $9,000 in capital gains tax, which is the purchase price minus the basis.
In some cases, such as a gift of a home, the recipient may face capital gains tax if the property is sold. But if you inherited a home (rather than a gift), you can avoid this tax burden because the basis of the inherited property reverts to market value when the owner dies.
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For cash payments other than gifts, you probably don't need to worry about tax reporting. For example, you don't have to tell the IRS about money you pay someone to mow the lawn, walk the dog, or paint your spare room. The same goes for the cash you get for most of the items you sell privately.
The Timing Of Taxable Gifts
That is, unless you are buying products to resell online or making a regular income from your sales. So, your activity can be a business. In that case, you must report the amount as income on Schedule C or other business tax forms. While it's common for people to pay for services like PayPal and Venmo, the new IRS reporting requirement can create problems.
Beginning in the 2022 tax year, individuals who receive payments of $600 or more for goods and services through third-party payment processors will receive a 1099-K form. Previously, this form was only available to those who received at least 200 payments of more than $20,000.
If I don't classify (the payment) correctly when I send it, there's a chance that (the recipient) will get a 1099-K at the end of the year," Rosen said. He doesn't advise people to ignore the form, saying, "If you have it, the IRS has it."
If you receive 1099-K payments from family and friends, Rosen says you have two options: Try to see if the payment processor can correct the error or report the amount on your tax return. For his clients, Rosen plans to take the latter approach when faced with this situation.
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