Gift Tax

• When you receive a gift of cash, you will never owe income taxes in it. A gift is not considered compensation unless it was paid for a good or service. Because of this, the donor will not be able to deduct the value of the gift from his income tax. The cash gift may be charged gift taxes. Small gifts that total below $13,000 a year will not be taxed. The gift tax is designed for wealthy households, and only large transfers are considered taxable.
  
  

Gift Tax Rates

• You are allowed to give away $13,000 a year to any person tax-free. You do not need to report annual transfers below $13,000 to the IRS. If you give away more than $13,000 to one person, you must report the gift to the IRS using tax form 709. Throughout her lifetime, a donor is allowed to give away $5 million of assets over the $13,000 annual limit without paying any taxes. Any taxable gifts over the $5 million limit will be taxed at the current gift tax rate of 35 percent.
  
  

Paying Gift Taxes

• It is the responsibility of the donor of a gift to report it to the IRS on Form 709. Typically, the donor will pay the gift taxes as well. In some cases, the receiver of a large gift may need to pay the gift taxes. The donor can elect a net gift on her gift tax return. This elective will tell the IRS to bill the receiver of the gift for any applicable gift taxes. Be sure to ask the donor of your gift if he has elected a net gift so you can be prepared for any taxes.
  
  

Gift Tax Exemptions

• Not all taxable gifts are charged the gift tax. If you received a cash gift from your spouse, you will never owe taxes on it. There is an unlimited marital deduction on transfers between spouses. The gift may also be deductible if it is used for education or medical purposes. All payments made to a school or medical provider on your behalf are exempt from gift taxes. The payment must be made directly to the school or provider. If you receive the cash first, gift taxes will be charged.