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I know that (in the U.S.) the gifter pays a gift tax (minus an exclusion and perhaps some other exemptions, but just speaking broadly here).

Does the recipient of the gift pay income tax or any other tax on the gift?

For example, if a parent gifts $13K to a child, the parent pays no taxes (assuming they didn't gift anything else to the child that year) because the first $13K is exempt from the gift tax. But does the child have to pay income or other taxes on the $13K they've received?

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No. You got it right. And two parents can gift $26,000 per year total to each spouse of a married couple. So if you are flush with cash and have multiple kids and grandkids, the amount multiplies up pretty fast.

  • It is useful to remember that for purposes of gift tax and estate tax that each individual is exactly that, an individual. Unlike income taxes, where married spouses can file jointly, everyone is their own person for gift/estate taxes. – superjessi Aug 14 '11 at 19:24
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    Good point. To gift the $26k, each parent should write a separate check. $13k each, of course. – JoeTaxpayer Aug 14 '11 at 20:22
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As @Joe pointed out you have it right.

Also keep in mind that there are some other very specific loopholes, especially for grandparents. Sometimes this is indirect, For example, a grandparent can pay directly to things like Tuition for their grandchildren, or could pay into a 529 plan.

Between the AARP, and the fact that many of our elected representatives are themselves grandparents, there's a lot of special provisions that have been made for them, especially with regard to what they can do for their grandkids. (the emotion behind many of those provisions is I think well summed up by a quote from Martin Sheen's President Bartlett character from West Wing "..let me tell you something, don't ever ever underestimate the will of a grandfather. We're madmen, we don't give a damn, we got here before you and they'll be here after. We'll make enemies, we'll break laws, we'll break bones, but you will not mess with the grandchildren."

If you have substantial assets that you want to start transferring 'down' to other family members now, to for example avoid having that money subject to estate taxes when you die, then it is a really good idea to consult a Enrolled Agent, or a CPA or Attorney that specializes in taxes and estate/inheritance issues.

  • Ooh, excellent point to add here. A gift to a 529 is still limited to the $13k/yr rule except you can gift up to 4 years ahead, i.e. $65k, and then no gift next 4 years. Also, you can pay the college tuition without limit, but it must be paid directly, same for medical payments. – JoeTaxpayer Aug 16 '11 at 3:38

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