One common tax myth is the belief that you don’t have to pay taxes on money gifted to you. This misconception can lead to misunderstandings about tax obligations. Here's what you need to know to stay compliant and avoid these pitfalls.

Origin of the Myth

• Gift Recipient Exemption: Many people correctly understand that the recipient of a gift does not pay taxes on the gift, but this leads to confusion about overall tax implications.

• Lack of Awareness: There is often a lack of understanding about the potential tax responsibilities of the gift giver.

Reality of Gift Taxes

• Recipient's Perspective: As the recipient of a gift, you do not have to report the gift as income and do not pay taxes on it.

• Giver's Perspective: The person giving the gift may be subject to gift tax if the value of the gift exceeds the annual exclusion limit set by the IRS.

IRS Guidelines on Gift Taxes

• Annual Exclusion: For 2024, the annual exclusion limit is $17,000 per recipient. Gifts under this amount do not require reporting to the IRS.

• Lifetime Exemption: Gifts exceeding the annual exclusion may count against the giver's lifetime gift and estate tax exemption, which is $12.92 million in 2024.

• Form 709: If the gift exceeds the annual exclusion, the giver must file Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return).

Why the Myth Persists

• General Misconceptions: Many taxpayers focus on the recipient's tax-free status and overlook the potential tax implications for the giver.

• Anecdotal Advice: Misleading information and anecdotal advice from non-professional sources perpetuate the myth.

Avoiding the Pitfall

• Understand Both Perspectives: Recognize the tax implications for both the recipient and the giver of a gift.

• Recipient: No need to report or pay taxes on the gift.

• Giver: May need to file a gift tax return if the gift exceeds the annual exclusion limit.

What You Need to Do

• For Recipients: Keep records of significant gifts received but understand you generally do not need to report them as income.

• For Givers: Track the value of gifts given and be aware of the annual exclusion limit. File Form 709 if necessary and consider the impact on your lifetime exemption.

Consulting a Tax Professional

• Seek Professional Advice: Consulting a tax professional can help ensure you meet all reporting requirements and understand the tax implications of large gifts.

• Accurate Records: A professional can assist in maintaining proper documentation and filing any necessary gift tax returns.