Sunday, January 10, 2010

Are Gifts That You Receive Taxable?

Q I received a large cash gift from my father last year? Do I have to report it on my income tax return?

A No. Gifts are NOT taxable to the recipient. Some gifts require the filing of Form 709 – US Gift Tax Return, and some can incur gift tax. However, filing the return and paying any gift tax due is the responsibility of the gift giver, not the recipient.

What is considered a gift? Gifts include both money and property given out of affection, respect, or other generous motivation with no consideration of payback in the form of past or future work, promotional activity, or other benefit.

Gifts include the use of property without expecting to receive something of equal value in return. Also, if someone sells you something for far less than the fair market value, they have given you a ‘gift’ in addition to the price they received. If you receive an interest-free or reduced-interest loan, the IRS considers the interest given up as a gift.

What about gifts from an employer to an employee? Within limitations, gifts are allowed tax free to reward longevity or safety achievements. But a gesture of gratitude, in cash or goods, for great work the past year or to spur efforts in the future is taxable, says the IRS. That includes Christmas or other bonuses; your employer should include the bonus in taxable income on the W-2.

Certain untaxed gifts between family members can have a hidden bite that may not be apparent for years. Take a grandfather who gives stock to his granddaughter. Though there's no immediate income tax on the gift, there may be a large liability when the securities are sold. That's because profit on the sale will generally be measured from when granddad acquired the shares, and that profit will be taxable to the granddaughter when she sells the stock.