Gift money and taxes?

Question

I heard I can only receive something like $12K tax free. If my parents give me more than that amount, Must I claim the excess gift money as regular income? Since the IRS has no mechanism for parents to report the gift giving, how will the IRS know if I do not file a claim? In other words, is this an "honor system" situation?

Ok, I now know the giver MAY have tax consequences. I found the info at irs.gov. But, is this an honor system? If my mom writes me check for $50K and files nothing, how will the IRS verify she wrote this check?

Answer 1

No, you wouldn't claim a gift as income - it's not taxable to the recipient no matter what the amount is.

But what makes you think there is no mechanism for parents to report the gift-giving? If any one person gives any one other person over $12,000 in a calendar year, the GIVER is required to file a gift tax return. There might or might not be tax due - if there is, the giver pays it.

Answer 2

The person who gives the gift MAY have to file a Gift Tax Return and pay a Gift Tax. The recipient of the gift NEVER pays any tax on the gift no matter how large it is.

The IRS most certainly DOES have a mechanism for reporting gifts -- the dreaded Gift Tax Return. But, that's for the giver to worry about, not the recipient.

In response to your additional details, any single cash transaction of $10,000 or more (or aggregate transactions over a short period of time) will be reported to the Treasury Department by the bank. The IRS is the agency that collects this data so they absolutely will know about that $50,000 check. Her bank will report it when it clears and your bank will report it when you cash or deposit the check.

If your mother then didn't file a Gift Tax return the IRS could assume that it was a gift and levy tax on the amount over $12,000 (even though her lifetime exclusion would probably shield her from tax had she filed) and then could turn around and levy tax on you as ordinary income. For this reason, playing by the rules is ALWAYS the safe way to proceed.