Being generous can bite you at tax time because of the gift tax imposed on large transfers by the federal government. Under the gift tax structure, the person giving the money -- not the person receiving the money -- is on the hook for the gift tax bill. As long as it's a gift, you won't owe taxes on the money no matter how much you receive.
The IRS allows an annual exclusion that allows a person to give up to $13,000 without incurring any gift taxes as of 2013. For example, your uncle could give you $13,000 and your sister $13,000 in the same year and he wouldn't incur any gift taxes. But if your uncle gave you $19,000, the last $6,000 would be above the annual exclusion, so it would be taxable. Of course, if your uncle did that, he would be on the hook for the tax bill, not you.
Gift Tax Exclusion
The gift tax exclusion allows you to gift money in excess of the annual exclusion without paying taxes on it. As of 2013, the exclusion allows everyone to transfer up to $5,250,000 without any gift taxes over their lifetime. However, any portion of your unified credit that you use during your life reduces the amount you can transfer tax-free to your heirs at your death. For example, if you made $3 million of taxable transfers during your life and the credit exempts the first $5,250,000, you could transfer $2,250,000 estate-tax free at your death.
The IRS exempts certain types of gifts from gift taxes no matter how much is given, so neither you nor the person helping you out will get hit. First, your spouse can give you any amount without it being a taxable gift. Second, any amounts paid directly to a hospital for your medical bills or to a school for your tuition aren't taxable. But, if someone gifts you money and you spend it on medical or educational expenses, that does count as a taxable gift.
If you receive a gift that you later sell, you might have to pay taxes on some of the proceeds. With gifts, your basis is what the donor paid for it -- it doesn't change when you receive the gift. For example, say your dad gives you shares of stock as a present. If he paid $5,000 for the stock long ago and you turn around and sell it for $9,000, you owe taxes on the $4,000 profit.
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