A gift becomes taxable when it is given with a repayment or to ensure a certain outcomes such as a heightened work load or for promotional efforts.
What is a Gift?
It should be noted that if a gift is given to you out of love or affection, it is considered a gift. The same is true for those gifts given as a generous action requiring no pay back in any form. A typical gift giving scenario is during the holidays. Family members and friends exchange gifts out of the goodness of their heart, because they want to. This is an official gift. A gift does not have a repayment or follow any purchase or promotion.
If you get a “free gift” from a merchant such as a diamond necklace, trip, fragrance or any other products, it is considered taxable. According to the IRS, it is considered an indirect service rendered. This means events such as music and movie awards have the stars paying thousands in taxes.
What About Gifts From An Employer?
Employers may provide gifts as well. Typically, they are rewards for length of service or a job well done. Non-cash rewards can be given that are not considered taxable. However, if you get a cash reward or a gift for doing great in the past, or incentive for doing better in the future; the gift is completely taxable.
Amount Thresholds Apply
As the laws state, a person can receive up to $12,000 in gifts in one year before it becomes taxable. After the $12,000 threshold, a potential gift tax applies to the giver. This gift tax does
not technically become due until the gift giving reaches $1,000,000.
It is important to note that the $12,000 limit before taxes occurs is an accumulative sum. This means that you can give one person $10,000 and another $2,000 and still be under the taxable amount. It also means that no matter if you give 12 people a $1,000, or 1 person $12,000, you cannot give any more without being taxed because it is not on a ‘per person’ basis.
If a couple is married and they have a child they want to give money too, they can give a total of $24,000. This is what is known as gift splitting. Each person, the husband and the wife, are giving $12,000 each which puts them under the taxable limit.
Exclusions For Gift Tax
When it comes to gift tax, there are exclusions. The most common exclusion is the sum of gifts does not exceed $12,000. You can also be exempt from gift tax if you pay for an educational tuition on behalf of someone or medical bills and expenses that were incurred by someone else and paid by you.
An exemption also applies if you give a gift to a political organization. Moreover, gifts given to charities that qualify are deductible from the amount you have gifted.
As you can see, gift giving is sometimes a grey area. If you keep in mind motives, it becomes a lot easier to determine which gifts would be taxable and which ones would not. The best thing to do is consult your tax adviser, whenever in doubt, because gifts can fall into many categories.