My parents offered me a generous gift, specifically they want to pay off $10,000 of my mortgage principal (the mortgage is under my name, not theirs).
However, I am hesitant to let them do this, as I am worried that IRS will consider it a taxable gift and tax that amount.
Is that a valid worry? Or is it safe to let them pay $10,000?
Gifts are not taxable income to the recipient.
In the US, gift tax is paid by the giver, not the recipient. However, there is an annual gift exclusion amount (currently $15,000/year). Any gifts under that amount are not taxable and don't need to be reported to the IRS. This limit is per person, so your parents could give you up to $30,000 and have no reporting requirement or gift-tax liability. If you are married that can double, because it's per recipient and per giver.
Even when the annual gift tax exclusion is exceeded, it doesn't necessarily mean there's gift tax owed, as there's also a lifetime exemption, but amounts above the annual limit are required to be reported and either gift tax is owed or the excess counts toward the lifetime exemption.
Highlights from an IRS.com article, "Here are 7 things you should know about the Federal gift tax":
1. Gifts to Family Members Count
The gift tax and exclusion limit (below) apply whether you are making the gift to a complete stranger, a nephew, or your own children. The only person you can give a gift to that is exempt from the gift tax is your spouse. Gifts to your spouse qualify for the marital deduction.
2. There Is an Annual Gift Tax Exclusion
You do not have to pay tax on gifts that are less than the annual exclusion limit, which generally changes every year. Currently, the annual exclusion is $15,000 per recipient. In other words, you can give up to $15,000 to each of your children this year without having to pay any gift tax.
5. Married Couples Can Give Twice As Much
Spouses can each give up to $15,000 to the same recipient and still stay within the annual exclusion threshold. Together, a married couple can give $30,000 to each donee without incurring the gift tax. Most tax professionals recommend that married couples give money in the form of 2 separate checks, each signed by one of the spouses, to avoid any confusion.
