In the United States tax system, gift income refers to property being transferred to a person by another person in exchange for nothing. Gift income is handled by a gift tax, and is governed by Chapter 12, Subtitle B of the Internal Revenue Code. The gift tax has largely been rolled in with the estate tax, to allow people to minimize the amount of estate tax they pay after they die by giving a great deal while they are alive. Still, there remain key differences between the two, and so they are generally treated as quite separate.
The burden of the gift tax is carried by the giver of the gift, not by the recipient, and the recipient generally does not have to pay anything. There are some exclusions, however, to allow people to give without paying taxes on a fair amount of worth each year. For example, there is a basic exemption, under which an individual can, as of 2009, freely give up to $13,000 US Dollars (USD); similarly, a couple could give up to $26,000 USD without having to pay taxes on it. Other gifts that are exempt from this tax include gifts one gives to one’s legal spouse, gifts given to charity 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 taxes on that gift. The IRS allows most gift income to remain as untaxable income, although there are some notable exceptions. Gift income which comes from an employer to an employee, for example, is still considered taxable income, and must be claimed. This similarly goes for gifts given on the behalf of an employer to an employee, or gifts given from an employer to someone on behalf of the employee. There are a few special cases in which this gift income may remain exempt from taxation, but they are rare.
Gifts received which in turn generate their own income are not received as gifts, but subsequent income is taxed. For example, if you were to gift a person a hot dog stand, you would pay taxes on the gift you gave them, but they would pay no taxes on the worth of the hot dog stand itself. Any revenue brought in by the stand, however, would not be considered gift income, but simply traditional revenue, and so would be taxed accordingly. This is to avoid a situation where income could remain entirely untaxed on both sides of the equation.
One of the main ways in which the gift income exemption is used is for large estates to minimize their ultimate liability under the estate tax. While a person is still alive, they can give up to the maximum annual exclusion away each year to the people, such as their children, who will ultimately be the recipients of their estate. In this way worth is drained from the estate and to the heirs, without being taxed, so that when the giver dies their estate will have less worth to fall under the estate tax.
