Insider Jeff Fleming

Taxes on Gifts: Good News and Bad News

Plan well before you make a financial gift, or the recipient might end up paying taxes! Plus, discover the benefits of online investing.

Dear Jeff:
I have given my son $13,000 as a gift. Does he have to pay taxes on that money or do I pay as I cashed in a CD and now have to report receiving the money?

Thanks, Mimi

Jeff Says:
Rarely am I able to give positive answers when the subject is taxes. So, I'm delighted to tell you that your son will NOT have to pay income taxes on your gift of $13,000. The Internal Revenue Code specifically excludes from gross income any money received by gift or inheritance, regardless of the amount.

Unfortunately, there is some bad news, too: an individual is limited to annual gifts of $10,000 or less during each calendar year to each individual. This means that you can give $10,000 to as many different people as you want to during a year. However, because your gift to your son exceeded this amount, you are required to file a gift tax return by April 15 of the year following the year in which you made your gift. This is the same deadline as the one for filing your income tax. Back to the good news. You will not actually owe any gift taxes until the total amount of your gifts exceeds approximately $650,000. You have to fulfill simply the administrative matter of filing a gift tax return.

As far as income taxes are concerned, you will be taxed on income earned on the CD while you owned it. Your son will owe income taxes on income earned after you made the gift to him.

For more gift ideas, read our 5 Great Financial Gifts feature.

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