Understanding the tax laws pertaining to gifts can be challenging. This is particularly true if a taxpayer receives something from another person, and it isn't immediately clear if it is compensation for a service or a true gift. 

Fortunately, the IRS has guidelines for determining compensation vs. a gift in the eyes of the tax code.

Under federal law, outright gifts aren’t included in income. However, when received from someone who is also paying for services or who is receiving services without paying adequately for them, the “gifts” may be deemed compensation.

To decide whether or not an item received is a gift or compensation, look at the payer’s intent. If the payer takes no deduction for an amount on his/her own return, it is evidence that the amount paid is considered to be a gift (and vice versa).