Do I need to pay taxes on gifts I receive in the U.S.?

According to IRS rules in the U.S., giving money or property to someone else without receiving anything in return is considered a gift. The gift tax is a federal tax on the transfer of money or property to another person, and it is usually the giver, not the receiver, who is responsible for paying it. Understanding the rules around gift tax, including exemptions and penalties in different situations, is crucial to avoid unnecessary tax burdens. This article will explore two common gift scenarios and their federal gift tax implications.

Gifts from U.S. Citizens or Residents

U.S. citizens or residents (see "Resident and nonresident aliens") giving a gift over a certain value may need to pay taxes on it. Whether the giver must pay taxes depends on two key factors: the annual gift tax exclusion limit and the lifetime gift tax exclusion limit.

Annual Gift Tax Exclusion

In 2024, the annual gift tax exclusion amount (also known as the gift tax exclusion) for each recipient increased to $18,000, up from $17,000 in 2023. For married couples, each spouse can exclude up to $18,000, totaling $36,000. This is the maximum amount you can give to a single person without needing to report it to the IRS. However, exceeding the annual exclusion doesn’t mean you automatically have to pay gift taxes—it simply means you’ll need to file IRS Form 709 to disclose the gift. Any amount over the annual limit will then be deducted from your larger lifetime gift tax exclusion.

Lifetime Gift Tax Exclusion

Beyond the annual exclusion, there’s a lifetime gift tax exclusion. Any amount exceeding the annual exclusion will be deducted from your lifetime exclusion. Once you’ve given more than this lifetime exclusion, you may start owing taxes. In 2024, the lifetime exclusion is $13.61 million, up from $12.92 million in 2023. Because this exclusion applies to each person, married couples can exclude double the amount—$27.22 million in lifetime gifts. In summary, taxpayers generally only pay gift taxes when they exceed their lifetime exclusion (set at $13.61 million for 2024). The gift tax rate ranges from 18% to 40%.

Case Study

John was born into a U.S. family and works in New York. His father lives in California and wants to help John buy his first house in New York. John’s father is willing to give him $50,000. If John’s father gives him $50,000 in 2024, he’ll use up the $18,000 annual exclusion. The downside is that he’ll need to file a gift tax return in 2024, but the upside is that he likely won’t need to pay gift taxes. Why? Because the extra $32,000 ($50,000 - $18,000) will count against his father’s lifetime exclusion. If John’s father gives him another $50,000 next year, the same would apply: he’d use up that year’s annual exclusion and reduce the lifetime exclusion again.

Gifts from Non-U.S. Citizens and Non-Residents

As previously mentioned, the U.S. generally taxes the giver, making this akin to a transfer tax. The U.S. lacks jurisdiction over financial transactions by non-U.S. citizens or non-residents unless they involve property located within the U.S. (such as real estate). This means the IRS has no jurisdiction over gift taxes on gifts from non-U.S. residents. Therefore, if a foreign family member or friend who is neither a U.S. citizen nor resident gives you a gift from outside the U.S., no taxes are due.

However, according to IRS regulations, if a gift or bequest from a foreign non-resident exceeds $100,000 in a tax year, the recipient must report it. This is done by filing Form 3520. For gifts or bequests over $100,000, the recipient must list each gift over $5,000. Failing to report this on time or correctly may incur penalties: a 5% monthly penalty on the gift amount (capped at 25%). The filing deadline for this form is the 15th day of the fourth month following the end of the U.S. person’s tax year.

Case Study

Peter has lived in the U.S. for a while, found a job, and decided to stay. Peter’s father, who lives in China and is neither a U.S. citizen nor resident, wants to help Peter buy his first home in the U.S. by giving him $150,000. Since Peter’s father has never been a U.S. resident or citizen, he does not need to pay taxes on this money in the U.S.; however, because the gift exceeds $100,000, Peter needs to report it. If Peter fails to submit Form 3520 on time or correctly, he may face a 5% monthly penalty on the gift amount (capped at 25%).

If Peter’s father transfers the money to Peter’s foreign account, leaving Peter to handle the transfer to the U.S., the reporting requirements still apply. Because it’s a gift from a non-U.S. citizen to a U.S. tax resident, Peter must report it. In addition to Form 3520, Peter must also file an FBAR (Report of Foreign Bank and Financial Accounts). If the total value of your foreign accounts exceeds $10,000, the actual form required is FinCEN Form 114.

Summary

Understanding the rules, exemptions, and penalties around U.S. gift tax helps you avoid unnecessary tax risks. Whether it’s a gift between U.S. residents, from a non-U.S. resident to a U.S. resident, or from a U.S. resident to a non-resident, each scenario has specific tax treatment. In complex cases, consulting a tax professional is recommended to ensure compliance and make the best financial decisions.