Ask the taxgirl: Income Tax Consequences of a Gift

Taxpayer asks:

Hi Tax Girl

If someone pays my Credit line directly. i.e. they write a check directly to my bank to lower my credit line balance.
with their after tax dollars. Is this taxable income to me.

Taxgirl says:

It depends on who that “someone” is…

In most cases, this would be considered a gift to you and since it’s not an appreciated asset (it’s just plain ol’ cash), there should be no income tax consequences. There may be gift tax as a result of the gift (depending on the amount – the current annual exemption for gifts is $13,000 per person per year); gift tax, however, is payable (if due) by the person who makes the gift and not by the recipient. It is not an income tax and is only due once you’ve exhausted your lifetime exemption. It can be a complicated issue, so the person making with the gift will want to check with his or her tax professional for more information.

There are some exceptions to the gift rule. It’s not a gift if the payment is in exchange for any consideration – in other words, if a person is paying your credit down because you painted their house, then it’s not a gift, it’s compensation. Similarly, the IRS considers significant gifts made by an employer to an employee compensation and not a gift at all. In either of those cases, the payment would be considered income.

If it’s a plain vanilla transaction – your girlfriend wrote a check to pay off your line of credit – there are likely no income tax consequences to you (but possibly gift tax consequences to the girlfriend, as noted above). But if it’s tricky at all, you’ll want to get some professional advice about how to characterize it.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

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