Tag: Income

Gifts and Taxes

It seems simple enough. You give a gift or receive a gift. What about taxes? Do you have to pay taxes when you receive a gift? What if it is a lot of money? Do you pay taxes if you give a gift?

Before answering these questions, let’s figure out what qualifies as a gift. The IRS says:

The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not.

The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.

Do you pay tax if you receive a gift?

Generally, no. Taxes are paid by the person giving the gift.

Do you pay taxes if you give a gift?

The answer to this question depends on the amount of the gift. The annual exclusion for 2014, 2015, 2016 and 2017 is $14,000. This amount is per individual per gift. As an example, if two parents wish to give a gift to their two children, then they can give each child $28,000 (2 X $14,000.) If the gifts are greater than the annual exclusion amount, then gift tax may apply. Taxpayers should file Form 709.

Still confused? See the link below for answers from the IRS, and contact your CPA or tax professional.

IRS Frequently Asked Questions on Gift Taxes

 

What is income?

It is tax time, and that means that it is time for me to start answering client questions about income. Generally speaking, if you received money, property, or services, you have income. Examples of income include wages and fringe benefits, investment income such as interest, dividends, or capital gains, business income, and income from bartering. In some cases, your income may be documented. For example, if you have wages, then your employer will give you a W-2. Interest and dividends are reported on 1099s. If you are self-employed you may receive 1099-MISCs if the amounts paid you by clients are above a certain amount.

Not all income is documented.

If you run a business, it is up to you to keep track of revenues and expenses. If you are self-employed, some of your income will come from clients that will not be required to send you a 1099. Please avoid the temptation to forget to include this undocumented income when you are getting your books ready for filing your tax returns. The IRS is pretty good at comparing expenses to revenues and figuring out when income is not reported. If you are caught you will end up paying the taxes plus penalties and interest.

Not everything is taxable.

Income can either be taxable or nontaxable. For example, if you receive a gift, that is not normally taxable income. Keep in mind that depending on the size of the gift, the giver may have to pay gift tax. Some income such as interest from some municipal bonds may also be nontaxable. Nontaxable interest, however should be reported on a tax return.

Don’t forget your basis!

If you sell investments or your home, you will receive a Form 1099 for the gross proceeds. Be sure to figure out your cost basis, or what you paid. For example, if you have a stock portfolio, and you sell stocks worth $1,000 then you will receive a 1099 for that amount. However, your net income is the proceeds less whatever you paid for the stock. Don’t forget any reinvested dividends. The same thing applies if you sell your home. Depending on the circumstances, you may be able to exclude a lot of the gain. Be sure to talk to your tax pro if you have sold a home. If you complete your own tax return, read the instructions carefully.