Gift income in the US is subject to a gift tax, but there are exclusions, such as a $13,000 exemption for individuals and $26,000 for couples. Recipients generally do not pay tax, but there are exceptions, such as gifts from employers to employees. Gifts that generate income are taxable, and the gift income exemption can be used to minimize property tax liability.
In the United States tax system, gift income refers to property that another person transfers to a person for nothing. Gift income is handled through a gift tax and is governed by Chapter 12, Subtitle B of the Internal Revenue Code. The gift tax has been largely included with the estate tax, to allow people to minimize the amount of estate tax they pay after they die by giving a large amount while they are alive. Still, there remain key differences between the two, which is why they are generally treated as quite separate.
The gift tax burden is borne by the giver of the gift, not the recipient, and the recipient generally does not have to pay anything. However, there are some exclusions to allow people to give tax-free on a fair amount of value each year. For example, there is a basic exemption, under which a person may, as of 2009, freely give up to $13,000 United States Dollars (USD); Similarly, a couple could give up to $26,000 USD without having to pay taxes. Other gifts that are exempt from this tax include gifts you give to your legal spouse, gifts given to charitable organizations, or gifts in the form of payment for medical or educational services for a person.
Generally speaking, the recipient of a gift is excluded from paying tax on that gift. The IRS allows most gift income to remain tax-exempt, although there are some notable exceptions. Gift income that comes from an employer to an employee, for example, is still considered taxable income and must be claimed. This also applies to gifts given on behalf of an employer to an employee, or gifts given by an employer to someone on behalf of the employee. There are some special cases where this gift income can remain tax-exempt, but they are rare.
Gifts received that in turn generate their own income are not received as gifts, but subsequent income is taxable. For example, if you gave someone a hot dog stand, you would pay tax on the gift you gave, but you would not pay tax on the value of the hot dog stand. However, the income generated by the booth will not be considered donation income, but simply traditional income, and will therefore be taxed accordingly. This is to avoid a situation where the income may remain fully tax-free on both sides of the equation.
One of the main ways the gift income exemption is used is for large properties to minimize their ultimate liability under property tax. While a person is still alive, they can waive the maximum annual exclusion each year to people, such as their children, who will ultimately be the recipients of their estate. In this way, the value drains from the estate to the heirs, tax-free, so that when the donor dies, the donor’s estate will have less value to fall under inheritance tax.
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