Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

What is the tax implication for a person receiving a gift of $100,000 from an individual?

1. The entire amount is taxable to the recipient

2. Tax-free to the recipient, but the excess over $13,000 is taxable to the donor

3. No tax implications for both parties

4. Taxed as a capital gain

The correct answer is: Tax-free to the recipient, but the excess over $13,000 is taxable to the donor

The option accurately captures the tax implications of receiving a gift, particularly one as significant as $100,000. In the case of gifts, the recipient does not incur income tax on the amount received; therefore, the entire sum is considered tax-free for the recipient. However, there is an important consideration for the donor: the IRS allows individuals to gift a certain amount each year without incurring gift tax liability. For 2023, this annual exclusion is $17,000 per recipient. In this scenario, since the donor has gifted $100,000, the amount that exceeds the exclusion limit—$100,000 minus $17,000—becomes relevant for the donor's tax responsibilities. Although the donor is not required to pay taxes on the gift immediately, they must file a gift tax return (Form 709) to report the gift, and it counts against their lifetime exemption limit (which is considerably higher, at several million dollars). Therefore, while the gift is not taxable as income to the recipient, the donor is subject to potential taxation and reporting requirements for the portion of the gift that exceeds the annual exclusion limit.