Do I Have to Pay Income Tax on a Gift?

In tax law, a gift is a transfer of money, property, or other assets from one individual to another without the expectation of receiving something of equal value in return. This definition helps differentiate true gifts from transactions that might appear as gifts but are actually payments for services or goods.

Gifts and Recipient Income Tax

Under U.S. federal tax law, gifts received are generally not considered taxable income to the recipient, whether cash, property, or other assets. The Internal Revenue Service (IRS) views gifts as transfers of wealth, not as income earned through labor, services, or business activities. This rule holds true regardless of the gift’s value. For instance, receiving a large sum of money from a family member does not trigger an income tax liability for the recipient. This principle distinguishes gifts from other financial inflows, such as wages, investment profits, or business earnings, which are typically subject to income tax.

The Gift Tax and Donor Responsibility

While recipients generally do not pay income tax on gifts, a separate federal gift tax system exists, which applies to the donor, or the person making the gift. This tax is designed to prevent individuals from avoiding estate taxes by transferring substantial assets during their lifetime. However, most gifts do not result in any gift tax being paid by the donor due to various exclusions and exemptions.

The annual gift tax exclusion allows a donor to give a certain amount to any number of individuals each year without incurring gift tax or using up their lifetime exemption. For 2025, this annual exclusion amount is $19,000 per recipient. This means an individual can give $19,000 to their child, $19,000 to a grandchild, and $19,000 to a friend, all within the same year, without any gift tax implications. If a married couple makes a joint gift, they can combine their exclusions, effectively doubling the amount to $38,000 per recipient per year.

Beyond the annual exclusion, there is a lifetime gift tax exemption, which is the total amount an individual can give away over their lifetime without incurring gift tax. This exemption is linked to the estate tax exemption and is also indexed for inflation. For 2025, the lifetime gift and estate tax exemption is $13.99 million per individual. If a gift exceeds the annual exclusion amount, the excess typically reduces the donor’s lifetime exemption, but no actual gift tax is usually due until the cumulative lifetime exemption is exhausted. Donors are generally required to report gifts exceeding the annual exclusion amount by filing IRS Form 709, even if no tax is owed, to track the amount used against their lifetime exemption.

When a “Gift” Isn’t Just a Gift for Tax Purposes

Sometimes, a transfer of money or property that appears to be a gift can be treated differently by the IRS, leading to various tax implications. For example, “gifts” from an employer to an employee are generally considered taxable compensation. These can include bonuses, awards, or other benefits provided in recognition of service, and they are subject to income tax and employment taxes for the employee, similar to regular wages.

Payments for services rendered, even if labeled as gifts, are also considered taxable income. If an individual performs work for another and receives a payment, that payment is income, regardless of how the payer characterizes it. This scenario often arises with independent contractors or freelancers, where a payment might be disguised as a gift to avoid tax obligations.

When appreciated property, such as stocks or real estate that has increased in value, is given as a gift, the recipient does not incur income tax upon receipt. However, the original cost basis of the property carries over from the donor to the recipient. If the recipient later sells this property, they will be responsible for capital gains tax on the appreciation from the donor’s original purchase price, not just the appreciation from the date of the gift.

Inheritances, which are assets received after someone’s death, are generally not subject to income tax for the recipient. While the deceased’s estate might be subject to estate tax, the beneficiaries typically receive the assets free of income tax.

Reporting Gifts to the IRS

The responsibility for reporting gifts primarily falls on the donor, not the recipient. The donor is responsible for reporting gifts that exceed the annual exclusion amount on IRS Form 709, “United States Gift (and Generation-Skipping Transfer) Tax Return.” This form tracks the amount used against the donor’s lifetime exemption. If a transfer is not considered a true gift for tax purposes, such as employer-provided “gifts” or payments for services, the recipient would then be required to report it as the appropriate type of income on their personal tax return.