Gifts and inheritances can represent a significant financial windfall, and understanding the tax implications of these gains is crucial for prudent financial planning. Fortunately, the Internal Revenue Service (IRS) often excludes gifts and inheritances from taxable income, but the rules surrounding these exclusions can be complex.

1. Gift Income

The IRS defines a gift as “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.” The giver of the gift, also known as the donor, is typically responsible for paying any gift tax that may apply. The recipient, or donee, generally does not need to include the gift as income on their federal tax return.

As of my knowledge cutoff in September 2021, an individual can give up to $15,000 per year to any other person without incurring a gift tax. If a gift exceeds this limit, the donor must report it to the IRS using Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. However, unless the total amount given to a person exceeds the lifetime gift tax exclusion amount ($11.7 million as of 2021), the donor will not owe any gift tax.

2. Inheritance Income

Inheritances, like gifts, are generally not considered taxable income by the IRS. If you inherit property or money, you will not have to report it as income on your federal tax return. However, any income that you derive from the inheritance (for example, rent from a rental property you inherit, or interest on inherited money you invest) is taxable.

Inherited property receives a “step-up” in basis, meaning that the property’s cost for tax purposes is its fair market value at the time of the original owner’s death. If you sell the property, you would only owe capital gains tax on the difference between the sale price and this stepped-up basis.

3. State Considerations

While federal laws do not generally tax gifts and inheritances, some states do impose taxes. It’s essential to consult with a tax advisor or professional familiar with your specific state’s regulations.

By understanding these principles, you can maximize the financial benefits of gifts and inheritances. As with any tax-related matter, it is always advisable to consult with a tax professional, such as those at T&Y CPA, to ensure you are in full compliance with all tax laws and regulations.

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Author: T&Y CPA Services
Contact: info@tycpaservices.com