If your parents are thinking about giving you a monetary gift, or have already done so, they may be responsible for paying gift tax. However, your parents can provide you with the money as a tax-free gift if the amount does not exceed the annual exclusion. If it does, the gift may still remain tax-free if they have a unified credit balance available.
Your parents, as well as every other taxpayer, are allowed to make a certain amount of gifts each year without incurring federal gift taxes if the amount does not exceed the applicable annual exclusion for that year. For example, in a recent year, the annual exclusion amount was equal to £8,450. This means that each of your parents can give you £8,450 ($26,000 for a couple) without having to pay gift tax. This annual exclusion tends to increase every few years for inflationary adjustments.
There may be years when your parents want to give you more than £8,450 each but don't want to pay the gift tax on it. Luckily, the federal tax law also provides each taxpayer with a unified credit amount in addition to the annual exclusion. Your parents should exhaust their annual exclusion first, but if it's not enough to cover the gift, they can use part of their unified credit to make the excess tax-free as well. In recent years, the unified credit has been £0.6 million per taxpayer. This amount is available for your parents to use throughout their entire life. But every time they use some of it, their balances decrease. For example, if both parents give you £13,000 then they each have a potential taxable gift of £4,550. If they use their unified credits, no tax is paid. However, each of their credit balances is reduced by £4,550 to £645,450. This is the amount of tax-free gifts they can continue to make in excess of annual exclusions for the rest of their lives.
In the unlikely event that neither of your parents have a unified credit available on their £13,000 gifts, then unfortunately, they each have to pay gift tax on their excess £4,550. This requires that they file a federal gift tax return on IRS Form 709 to report and pay the tax. Although there is no federal inheritance tax that you need to be concerned with, some states will require you to pay it on the gift you receive. When you receive the gift, you should access your state's department of revenue website to make that determination.
Gift Tax Return
If the annual total of gifts your parents make to you exceed the annual exclusion amount, a gift tax return is required, even if they decide to use the unified credit and report zero tax. They must also report all other gifts they make to other individuals that exceed the exclusion amount. However, when reporting other gifts, they can exclude gifts they make to each other, payments other people's medical or tuition bills and their gifts to charity.