If You Give or Receive Cash, You Need to Know These 6 tax rules
The IRS may require you to report whether you are giving or receiving cash.
You must be aware of when and how to report money to the IRS, whether you give financial gifts to family members or earn cash tips as part of the gig economy.
Depending on whether cash is considered income or a gift, how much money is transferred, and whether you are the giver or the recipient, there are various restrictions and reporting obligations.
Rick S. Vourganas CPA wants you to realize that it’s not simply cash money. The same regulations may apply to gifts of tangible goods, such as cars and computers can be seen as currency in the eyes of the IRS.
Here is a more detailed explanation of each rule and how it may apply to you:
You are exempt from reporting cash gifts up to $16,000 per year.
Depending on the quantity of the gift, tax rates on cash donations might range from 18% to 40%. The individual making the gift is responsible for paying the tax, but most people will never have to because of yearly and lifetime exceptions.
You were permitted to make donations of up to $16,000 in 2022 without incurring any tax or reporting obligations
The yearly exclusion cap will rise to $17,000 in 2023. The limit is per person, so a couple, for example, could give a combined gift to each of their children in a single year of up to $32,000.
Rick S. Vourganas wants you to know that giving money to family members can be a crucial part of an estate strategy. Giving money or other assets to family members tax-free while you’re still alive can be a terrific opportunity to really see those family members benefit from those presents.
Certain cash contributions, such as those made to cover tuition or medical expenses, are exempt from tax obligations. However, you must deliver the gifts directly to the hospital or school in order to be eligible for this exception.
Even if you are paid in cash, you must report all income.
Many people have welcomed gig work in recent years since it allows them to work from home and on their own schedule. However, those who receive cash rewards for any type of job should be aware of their responsibility to track that income and claim it on federal tax forms.
Even if the person or business who paid you doesn’t give you a Form 1099, you still need to record any income from consulting, freelancing, or other self-employment.
Your teen’s babysitting earnings are probably unimportant to the IRS, but if you fail to record full-time income from gig labor, you risk facing fines or audits. In the case of an audit, the government will contrast the income you report with the deposits you make to your bank accounts.
Although giving and receiving cash may appear like an untraceable transaction, IRS requirements still apply. Make sure you comprehend these essential tax regulations whether you are making a gift or paying an employee.
Gifts in Excess Require a Tax Form
A person must submit Form 709 to the IRS to declare an excess gift if their donation exceeds the exclusion threshold. They won’t, however, be required to pay taxes as a result.
This doesn’t necessarily create a tax straight away. This is due to the fact that, for the 2022 tax year, there is a $12.06 million lifetime exclusion in addition to the $16,000 annual exclusion. The excess amount violates the lifetime exemption.
Even if their combined gifts total less than $16,000, married couples who file their taxes jointly may be required to submit a Form 709. For instance, a husband and wife could each give their child $16,000, but in order to correctly split the $32,000 gift between them, they would need to report it to the IRS on Form 709.
Gift Reporting and Taxes are the Responsibility of the Donor, Not the Recipient.
The responsibility for reporting gifts and paying any taxes owed rests with the individual giving the gift. The addressee is not required to take any action.
Future tax consequences, such as paying capital gains tax on an investment, could result from what the recipient does with the gift. However, if someone accepts money, even if it exceeds the yearly exclusion threshold, they are not required to declare it to the IRS.
Account statements and any related tax filings should be kept as records of all of these activities for documentation purposes, according to Sturgeon.
Gifts with Increasing Value May Be Subject to Capital Gains Tax
Both monetary and non-monetary contributions are subject to the gift tax. Even if a non-cash present is below the gift tax exclusion, you can still have to pay capital gains tax on a portion of its value.
Let’s imagine someone offers you stock that is worth $10,000 but they only paid $1,000 for it. Your capital gains will be computed using the original purchase price when you sell those shares. The basis is the sum in question. You will have to pay capital gains tax on the difference between the sale price and the basis, or $9,000 if you sell the stock for $10,000.
In some circumstances, as when receiving a house as a gift, the recipient may have to pay a substantial capital gains tax if they later sell the asset. However, as the basis for inherited property is reset to the market value at the time of the owner’s death, you can escape this tax burden if you’ve inherited a house (rather than getting it as a gift).
Payments Made to Individuals Are Not Required to Be Reported.
You most likely won’t need to worry about filing any taxes for monetary payments that aren’t presents. For instance, you don’t have to inform the IRS about the money you paid to have your yard mowed, your dog walked, or your spare room painted.
The money you received for the majority of the products you sold privately is the same. Except if you regularly earn money from your sales or are purchasing goods to resell online. If so, your actions might qualify as business activity. If so, you would need to file a Schedule C or other business tax form and list the funds as income.
Even while using services like PayPal and Venmo for payments is prevalent, a new IRS reporting requirement could lead to issues. A Form 1099-K will be issued starting with the 2022 tax year to individuals who receive payments from third-party payment processors for products and services totaling $600 or more. This form was previously only sent to people who have received at least 200 payments totaling more than $20,000.
If a 1099-K is sent to you for payments you got from relatives and friends, you have two choices: either you can disclose the funds on your tax return or try to get the payment processor to fix the mistake.
Most payment services let customers send money along with a note. You may want to include a message describing the intended use of the money so that recipients have proof in case there are any issues in the future that the money isn’t taxable.
However, not all payment processors will be submitting 1099-K documents. For instance, Zelle claims that its service is not covered by the new regulation.
Bonus Tip: Report Payments Made to Household Employees of $2,400 or More
While most cash payments are exempt from reporting to the IRS, there are some domestic employees, like nannies, who are subject to various requirements. The IRS would most certainly designate someone as a home employee if they only work for you and you control how they spend their days.
You must start withholding Federal Insurance Contribution Act taxes for Social Security and Medicare if you pay an employee $2,400 or more annually. Employers and employees each pay a portion of the FICA cost, thus you are responsible for paying the other half of the 15.3% tax. Additionally, you might have to pay unemployment taxes.
You might want to apply for an employer identification number from the IRS if you have household employees. In order to disclose the wages you paid, you must also provide your employee with a W-2 each year and file a Schedule H Form 1040 along with your own taxes. If you have a need to manage payroll Rick S. Vourganas offers services that can help.
If you run a business, the rules are a little bit different. In that instance, you might need to send a Form 1099-MISC instead if your company pays someone to perform services, like cleaning your office, and you are not their only client.
Please note that after $600 in annual earnings, you must submit a 1099.
