Tax Rules to Know If You Give or Receive Cash

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Whether you work in the gig economy or are the recipient of a cash gift from a relative, you need to know if and how to report that money to the IRS. There are different rules and reporting requirements depending on whether it’s money that has been earned or gifted.

In general, these are the basics you need to know about cash gifts and cash payments:

Here’s a closer look at each rule and how it may affect you.

Cash gifts can be subject to tax rates that range from 18% to 40% depending on the size of the gift. The tax is to be paid by the person making the gift, but thanks to annual and lifetime exclusions, most people will never pay a gift tax.

“Anyone can give up to $15,000 per year free and clear,” says Andrew Rosen, partner and lifelong financial advisor with financial firm Diversified Lifelong Advisors in Wilmington, Delaware.

Just as the government provides a standard amount that is exempt from income tax, the same applies to the gift tax. For 2020, IRS rules exclude $15,000 per year per person from the gift tax. Gifts made to pay tuition or medical bills are also excluded, but to be eligible for this exclusion the gifts must be paid directly to the school or health care provider.

If a person exceeds the $15,000 exclusion limit, they must file Form 709 to report the excess gift to the IRS. That doesn’t mean a person will have to pay taxes though.

That’s because in addition to the $15,000 annual exclusion, there is an $11.4 million lifetime exclusion for the 2019 tax year. The lifetime exclusion rises to 11.58 million for the 2020 tax year. Anything reported on Form 709 is applied toward the lifetime exclusion and only amounts exceeding that are subject to gift tax.

Married couples who file their tax returns jointly may also have to file a Form 709 even if their gifts are less than $15,000, says Dann Ryan, managing partner at financial firm Sincerus Advisory in New York City. For instance, a husband and wife could each give $15,000 to their child, but they would need to report the $30,000 to the IRS on Form 709 to properly split the gift between them. “While it’s not a taxable event, you have to file,” Ryan says.

The gift tax can apply to both cash and noncash gifts. If you receive a noncash gift, you may end up paying capital gains tax on a portion of its value even if it falls below the gift tax exclusions, Rosen says.

For instance, let’s say someone gives you stock valued at $10,000, but they only spent $1,000 to buy it. When you sell those shares, your capital gains will be calculated based on the original purchase price. This amount is known as the basis. If you sell the stock for $10,000, you’ll pay capital gains on $9,000, which is the sale price minus the basis.

“Frequently, you see people give their homes away to their kids,” says Paul Joseph, attorney, CPA and founder of Joseph & Joseph Tax & Payroll in Williamston, Michigan. That could result in a significant capital gains tax for children if they sell the property. A home that is inherited, rather than gifted, may avoid this tax burden since the basis for inherited property is reset to the market value at the time of the owner’s death.

For monetary payments that aren’t gifts, you likely don’t have to worry about any tax reporting. For instance, there is no need to tell the IRS about the money you paid to the person who mows your lawn, walks the dog or paints your spare room.

“You don’t necessarily have to send them a 1099 (tax form),” Joseph says. However, different rules apply if you own a business. In that case, if your business is paying the person, a 1099-MISC form must be issued to anyone who’s been paid more than $600 during the year. A copy of the form must also be provided to the IRS.

While most cash payments don’t have to be reported to the IRS, the rules are different for some domestic workers, including nannies. If a person works exclusively for you and you dictate how they spend their day, the IRS would likely classify that person as a household employee.

Once an employee is paid $2,200 or more per year, you need to begin withholding Federal Insurance Contribution Act taxes for Social Security and Medicare. The cost of FICA is split between employees and employers so you will need to pay half of the 15.3% tax. Plus, you may be required to pay unemployment taxes as well.

“The important part is being proactive about when you’re going to go over that ($2,200) threshold,” Ryan says. If you have a household employee, you might want to apply for an employer identification number from the IRS. You also need to give your worker a W-2 each year and file a Schedule H (Form 1040) with your own taxes to report the income paid. An accountant may be able to assist with this process or some tax software companies have programs for those who want to manage payroll themselves.

Those receiving cash payments for any work are obligated to record that income and claim it on their federal tax forms. “The onus generally is on the business owner,” Rosen says. Money from freelancing, consulting or other self-employment must be reported even if you don’t get a 1099 form from the person or company who paid you.

The IRS isn’t likely concerned about your teen’s babysitting money, but you could get in trouble if you are making full-time income from gig work and fail to report it. In the event of an audit, the government will compare deposits to your bank accounts against the income you report to root out any discrepancies.

Cash may seem like an untraceable way to give and receive money, but IRS regulations still apply. Whether you are giving a gift or paying a worker, make sure you understand these crucial tax rules.

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