Do I have to pay taxes on money my parents give me?

April 16, 2010 5:14 PM

You Are Not My Accountant: I'm concerned that I've illegally not paid taxes for the past three years because I assumed that "gifts" and "income" were two separate things.

I am closing in on forty years of age. My tax record up until I quit my last job is spotless. Since I was not fired or laid off, I did not file for unemployment. I quit because I felt that I had gone as far as was possible in my career-a career I never wanted anyway-and thought I would take a break from "it all" for the first time in my life.

I was able to do this because my parents were willing and able to give me money every year: $3,000 a month. (Yes I know how lucky I am.) I live in a pretty expensive city, but I don't "spend" a whole lot of money (no big-ticket items or fancy meals or the like), so a net of $3k a month is ok enough to live on (I rent with a roommate, and we each pay $700/month, and I have to pay for my own health insurance which costs me $500/month-I can't get a less-expensive plan because I have many prescriptions).

I assumed that since this money was a "gift" from my parents, it was not subject to taxes. I don't know where I got that idea-I think I must have concluded without any evidence that "income" is something you get from working, and that the term didn't extend to mean any money that comes in at all.

I haven't worked any jobs during these few years that would require me to file taxes.

I'm pretty sure my parents didn't claim me as a dependent.

How badly have I screwed myself, and what do I do now?

posted by anonymous to work & money (12 answers total)

IAMATP, BIDWFO. I am not a tax pro, but I do work for one.

You're going to have to file amended returns and pay taxes on that money. IIRC, the gift limit is 12K, and everything over that is taxable.

You might want to find yourself an accountant or tax pro to sort through this. It's kind of a mess.
posted by mollymayhem at 5:19 PM on April 16, 2010 [1 favorite]

If you are in the United States, then you generally are taxed on gifts you give, not on gifts you receive. If the giver is a married couple filing jointly, they can give up to about $26,000 per year (exact amount varies each year) to each recipient without paying any tax; any amount after that is taxable.

See the IRS Gift FAQ and Gift tax in the United States.

I'm pretty sure my parents didn't claim me as a dependent.

If you are pushing 40, it's unlikely your parents can claim you as a dependent. You might want to talk to an accountant just to make sure everything is in order and you aren't missing anything else.
posted by mbrubeck at 5:21 PM on April 16, 2010 [1 favorite]

Looks like mbrueck is right and I am wrong. Which is awesome for you. And makes it a good thing I don't actually prepare the tax returns, just push papers and answer the phone.
posted by mollymayhem at 5:26 PM on April 16, 2010

1) The recipient never pays taxes on gifts, the giver does
2) Amounts given over the annual gift tax exclusion (currently $13,000 per giver per recipient) are still tax-free UNLESS the accumulated amount over the annual exclusion given in a lifetime exceeds $1 million per giver. (For example, if the annual exclusion is 13k, and your mom gave you 15k, she has used up 2k of her million dollar lifetime exclusion.) However, a giver who gives more than $13,000 per year per recipient must FILE a gift tax form (even if they don't have gift tax liabilities) in order to track their status against the lifetime $1 million exclusion.
posted by phoenixy at 5:31 PM on April 16, 2010 [3 favorites]

In all likelihood, I highly doubt your parents are reporting these transactions to the IRS, and unless you were audited for some other reason it's unlikely to be noticed and it's probably not likely anything bad is actually going to happen to you.
posted by floam at 5:42 PM on April 16, 2010 [1 favorite]

My understanding of agrees with mrbrubeck: your parents may be responsible for gift tax, but you are not. In addition to the annual $12K gift tax exception described above, there's a separate lifetime exemption of $1 million, above and beyond the $12K, on which your parents don't have to pay gift tax. However, if your parents are using that exception, they likely need to indicate as such when they file their tax returns.

Basically, your parents should check with a tax preparer to ensure they are reporting their use of their lifetime exemption properly. They also might want to be talking to a financial adviser or estate planner, but you shouldn't have any responsibility to report this as income or pay taxes on it.

The purpose of all this craziness, by the way, is to keep the estate tax system together. Without gift tax rules, a wealthy individual could just give away all their money prior to death and avoid all estate taxes. In reality, there's lots of ways to avoid or reduce estate and gift taxes through trusts and other instruments, but that's a whole different story.
posted by zachlipton at 5:50 PM on April 16, 2010

Given the number of Brits who come here, please tell us, when asking questions like this, where you live. The above is true for the U.S. We have not a clue about the U.K.
posted by yclipse at 3:49 AM on April 17, 2010

Yclipse...do you use $ in the UK? That should be an obvious clue, no?
posted by randomstriker at 7:53 AM on April 17, 2010

As others have said, assuming you're in the USA and this money really was a pure gift, it's unlkely anyone owes any taxes. However, your parents should have reported the gifts on their return since $36,000/year is more than the annual exemption for two people. They wouldn't owe taxes on it unless they've given a metric boatload of gifts over their lifetime but it would count against their lifetime exemption and reduce the size of their non-taxable estate when they die.

But, yeah, the tax implications for you are nil assuming the money really is a gift and not income.
posted by Justinian at 11:14 AM on April 17, 2010

Given the number of Brits who come here, please tell us, when asking questions like this, where you live. The above is true for the U.S. We have not a clue about the U.K.

Aside from the clue with the dollar sign, one of the tags is IRS.
posted by Justinian at 11:14 AM on April 17, 2010

If the money was given in cash (or check, money order, bank transfer, etc.), other posters are correct about you not owing taxes on it.

If your parents gave you securities or something else that you sold, you will owe capital gains tax based on the original basis. I'm not your accountant, see your accountant or start reading some of the lovely publications the IRS puts out on this.

It can be a good idea to file taxes even if you don't owe, you can still be audited even if you don't file. You should keep some sort of records that would show you have been given these gifts.
posted by yohko at 12:04 PM on April 17, 2010

I think the third big hint that the OP is in the U.S., after the "$" sign and the "IRS" tag is that he has to pay $500/mo for health insurance. Pretty much a dead giveaway, no?

OP, you say "I haven't worked any jobs during these few years that would require me to file taxes." Have you worked any jobs at all? I only ask because if you were confused about your tax situation, it's possible that any job you might have worked (unless it was something like a one-time, cash-on-the-table gig) might still be subject to taxes. If you received any kind of paperwork from any jobs at the end of last year (or the years before), you might want to take a look at it.
posted by tzikeh at 1:53 PM on April 17, 2010