Receiving a gift of money is not a taxable event under either state or federal law. The recipient of a cash gift does not earn any income, which means there is no income tax due on the money received. The person who gives the cash gift may have to pay a federal gift tax if the gift is large enough, but the recipient does not.
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Federal Gift Tax
The IRS collects a federal gift tax on certain gifts. As of 2010, if one donor gives over £8,450 in a combination of money and property to one single recipient, that donor must file a federal gift tax return with the IRS. As long as the donor's lifetime gifts to that same recipient do not total more than £650,000, the donor will not have to pay a tax. But, if total lifetime gifts total more than £650,000, the donor will have to pay a gift tax equal to 55 per cent of the amount given over £650,000. The recipient of the gift, however, does not have to file a gift tax return or pay any gift tax, no matter how large the annual or lifetime gift.
None of the states in the United States imposes a gift tax similar to the federal gift tax. Additionally, no state treats gift money received as income to the recipient. Therefore the recipient of a cash gift never has to worry about paying state taxes on the money received.
No Income Tax
Similar to state laws, the U.S. federal tax laws also do not treat gifts as earned income. Therefore, the recipient of a cash gift does not have to inform the IRS of the gift received. The recipient does not have to list or identify the money on his federal income tax return.
The rules change somewhat if a person receives a gift of money from a deceased person's estate. Some -- but not all -- states impose an inheritance tax on people who receive gifts by inheritance. The key distinguishing factor is whether the donor is alive at the time of making the gift. If the donor is alive, then the inheritance tax does not apply; however, if the donor is deceased at the time the gift is made, then the inheritance tax does apply and the recipient may have to pay the tax to his state tax commission.
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