Are Gifts Received from Family and Friends Taxable? What About Inheritance or Tax Refunds?
Many people wonder whether gifts received from family and friends are taxable, and if so, how they should be reported on their tax return. Additionally, they may also wonder about the tax implications of inheritance and tax refunds. In this article, we will provide detailed information on all of these topics.
Gifts Received from Family and Friends
Firstly, it is important to understand that the IRS does not consider most gifts received from family and friends as taxable income. However, there are certain situations in which a gift may be subject to taxation.
Gift Tax
If you receive a gift from someone and its value exceeds a certain amount, the giver may be required to pay a gift tax. As of 2021, the annual gift tax exclusion is $15,000 per recipient per year. This means that any individual can give another person up to $15,000 worth of gifts in a calendar year without having to pay gift tax. If the gift exceeds this amount, the giver may be required to file a gift tax return and pay taxes on the excess amount.
It is important to note that the gift tax is paid by the giver, not the recipient, so if you receive a gift that exceeds the annual exclusion amount, you will not be responsible for paying taxes on it.
Income from Gifts
In general, gifts received from family and friends are not considered taxable income, regardless of their value. However, there are certain exceptions to this rule. For example, if you receive a gift in exchange for services you have provided, the value of the gift may be considered taxable income. Similarly, if you receive a large gift and invest it, any income earned on that investment may be subject to income tax.
Inheritance
Inheritance refers to the money or property that someone leaves to another person when they die. In general, inheritance is not subject to federal income tax. However, there are several factors that can affect the tax implications of an inheritance.
Estate Tax
If the person who passed away had a large estate, their estate may be subject to estate tax. As of 2021, the estate tax exemption is $11.7 million per person, meaning that any estate valued at less than this amount is not subject to estate tax. If the estate is valued at more than this amount, the excess may be subject to estate tax.
It is important to note that heirs are not responsible for paying estate tax. Instead, it is paid by the estate before the assets are distributed to the heirs.
Step-up in Basis
When you inherit property, you typically receive a step-up in basis. This means that the value of the property is reset to its fair market value at the time of the original owner's death. This can be beneficial because it can reduce the amount of capital gains tax you will owe if you decide to sell the property in the future.
Tax Refunds
A tax refund is the amount of money you receive from the government when you have overpaid your taxes during the year. In general, tax refunds are not considered taxable income. However, if you claimed the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) on your tax return, your refund may be delayed due to certain provisions in the tax code.
Additionally, if you receive a refund from a prior year's tax return, the amount you receive may be subject to taxation if you claimed certain deductions or credits in the year the refund is received.
Conclusion
In summary, gifts received from family and friends are generally not subject to taxation, unless they exceed the annual gift tax exclusion or are given in exchange for services. Inheritance is also generally not subject to federal income tax, but may be subject to estate tax if the estate is valued at more than the exemption amount. Tax refunds are generally not considered taxable income, but may be delayed or subject to taxation under certain circumstances.