tax on gifts

maria_bebopAugust 17, 2008

Will I have to pay a tax if I give my daughter 20,000? I'm trying to figure this out. I know the limit is 12,000, so how much do I have to pay in taxes this year? I've never given anything before this.

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You haven't provided enough information to answer that question. Are you married? If so, you can give up to $24,000 (with your spouse's permission) without paying any gift tax. What will the gift be used for? If you are paying for college tuition for example, there is an education exemption.

For more information specific to your situation, go to the IRS website and read Publication 950.

    Bookmark   August 17, 2008 at 12:37PM
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The irs website was no help. I'm more confused than ever.

    Bookmark   August 17, 2008 at 3:21PM
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If you are married, then you can give your daughter $12,000 and your spouse can give your daughter $12,000 before you are required to file a gift tax return. If your daughter is married, then you can give her $12,000 and you can give her husband $12,000 before you are required to file a gift tax return.

If you are required to file a gift tax return, you may or may not have to pay taxes on the gift. That depends on how much of your lifetime exclusion ($1,000,000) you have used.

Is that as clear as mud? Please email me if you have questions.

    Bookmark   August 17, 2008 at 5:35PM
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I think the prior entries on this web have it wrong. It is not the GIVER who pays taxes if the gift exceeds the IRS limit. It is the RECEIVER of the gift that has tax liability if the amount received exceeds the IRS yearly limit. By the way, to take inflation into account, the annual tax free limit has been increased, so you need to check to find out what the new limit is for the year when the gift is given.

    Bookmark   August 18, 2008 at 5:03PM
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I don't think the information is wrong. Currently, you can give $12k per year to as many people as you want. Should you give someone $20k as a gift, the $8k overage, which is not covered by the annual gift tax exclusion, would be the reportable tax amount.

And since you don't pay tax on the first million in gifts made during a lifetime, you aren't going to be paying any taxes. Give away more than a million and you're in different territory.

The only nuisance, perhaps, is that you will have to file a federal gift tax return for each year in which your gifts to any one person exceed the annual gift tax exclusion for that year. Believe there are some changes coming in 2010.

    Bookmark   August 18, 2008 at 5:37PM
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Ahhhh, clear now. Thanks!!!!

Now the question, will the gift be considered income for my daughter so that she will owe taxes on it?

TIA, Maria

    Bookmark   August 18, 2008 at 6:06PM
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haus proud: "I think the prior entries on this web have it wrong. It is not the GIVER who pays taxes if the gift exceeds the IRS limit. It is the RECEIVER of the gift that has tax liability if the amount received exceeds the IRS yearly limit"

No, haus proud, you are categorically, beyond a reasonable doubt, 100%, wrong. A simple check of the IRS website will confirm this for you. In fact, I'm surprised you didn't do that before posting clearly erroneous information here.

    Bookmark   August 18, 2008 at 6:46PM
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No, the receiver does not pay taxes on the 20k gift. It is not considered income in the same sense as a salary or as interest & dividends from investments, etc. would be.

    Bookmark   August 18, 2008 at 8:37PM
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Thank you for putting that in easy to understand terms!


    Bookmark   August 18, 2008 at 9:30PM
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My apologies. I stand corrected. And my face is red.

    Bookmark   August 19, 2008 at 3:38PM
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My apologies. I stand corrected. And my face is red.

That's okay, we've all been there. I hope that your face has faded a slightly flushed pink.

    Bookmark   August 19, 2008 at 11:08PM
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Here's an easy explanation of the Federal gift tax provisions, from the WSJournal back in 2007:

"The federal gift tax exemption allows a person to give away a lifetime total of up to $1 million to friends, relatives or others without paying federal tax. One may also give away an unlimited number of annual gifts of $12,000 to any number of individuals without eating into the $1 million gift exclusion.

One case -- still waiting to be resolved when Ms. New left the IRS -- involved a man with power of attorney for his seriously ill aunt. On a Friday, he wrote a slew of checks in her name to relatives and even family members of his attorney. The woman died that Sunday. On Monday, her nephew appeared at her credit union to transfer $100,000 into her checking account to cover the checks. When questioned, he told the teller his aunt was still alive.

The teller, on lunch break, spotted an obituary of the woman and stopped the check.

Gift checks must be cashed before death or the IRS puts them back into the estate, according to Ms. New. "Anybody with the power of attorney should know the rules about it," she said. "The other heirs wrote to let the IRS know what was going on.""

This means you can give people MORE than $12K - in fact, any amount you wish - but the overage amount past the $12K/yr is then counted accumulatively towards the $1M gift tax total for the giver's estate. Thus, my MIL can give people any amount she wants, for instance, since her estate totals less than $1M: no gift tax could be triggered because she doesn't have enough assets to ever reach the $1M limit. Her tax advisor files the return but no tax is owed on either side.

Wealthier folks have to keep track of how much was given to "x" number of people so as to not go over the $1M unified federal gift tax limit.

For instance, wealthy grandparents decide to fund 529 plans for their four young grandchildren. Obviously, it's best to let the earnings/interest compound as long as possible. You can front-load with up to five years' of $12K gifting, as long as you give nothing else in the next 5 years.

So the grandparents are giving $60K ($12K x 5 yrs) for each of the 4 grandkids, for a total of $240K. Four 529 plans are set up. (The beneficiaries can always be changed, so long as records are kept by the giver as to who/how much is gifted, for tax purposes.)

Thus, in a single year, the grandparents have removed $240K of taxable income out of their estate, to pass tax-free compounded to the heirs of their choice. If they set up ILITs (Irrevocable Life Insurance Trusts) for some or all heirs, they will be using after-tax income to buy the policies but it allows them to ensure that at least some (if not all) of the estate over the then-current estate tax limits, will pass to their heirs tax-free.

These maneuverings are important on large estates because amounts over the estate tax limits, depending upon the state of domicile, can reach upwards of a 45% tax rate. For smaller estates of under $1M total assets, you don't need to worry about it save for filing the gift tax return for the year you make the gift.

    Bookmark   August 20, 2008 at 11:42AM
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Addendum to my post, above:

>>Thus, in a single year, the grandparents have removed $240K of taxable income out of their estate--This $240K is then deducted from the $1M lifetime gift tax exclusion. And I should not have said "taxable income" - that should be "total asset".

>>For smaller estates of under $1M total assets--Although life insurance will pass INCOME tax-free to the beneficiaries, the total amount of insurance in force at the time of death IS counted in the worth of the overall estate for estate tax purposes, but not gift tax exclusion total.

This is one of the major reasons why life insurance can be a valuable part of an overall estate plan, and why political discussions of the Federal Estate Tax, due to change every year until 2010, have caused difficulty in making firm estate plans for people who are close to the $1M asset worth. Unless the law changes - and there is great pressure to do so - in 2011 the estate tax exemption falls from the 2010 "zero tax" back to the old $1M level.

Only in 2010 - a little hard to plan one's demise so precisely! - does the Gift Tax Exclusion and Estate Tax both go to zero tax. In that year, if you plan on dying, you could give any amount away with no gift tax calculation needed, and no estate tax no matter how large your overall estate.

Hope all that's understandable!

    Bookmark   August 22, 2008 at 12:19PM
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jkom51 -- OK, I'm getting a 2010 calendar and penciling in "Call McInerney's" towards the end of December. LOL

Seriously, many thanks for all your generous contrbutuons to this forum!

    Bookmark   August 22, 2008 at 5:47PM
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chisue to jkom: "Seriously, many thanks for all your generous contrbutuons to this forum!"

Let me add my thanks as well. I always look forward to reading your posts.

    Bookmark   August 23, 2008 at 7:09AM
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Thank you both - I am very glad to be of help!

For those who have sizable estates and are fortunate to have children who are doing well, so they want to leave their assets to grandchildren or other third-generation relatives - get thee to an estate lawyer, fast. An estate large enough to trigger federal estate taxes, can be DOUBLE TAXED if you skip a generation. I ran across this mention while researching this discussion thread.

As I have no children, it doesn't matter much to me. But for anyone in this situation, I thought I should at least mention this, because it is very seldom discussed.

    Bookmark   August 23, 2008 at 1:17PM
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I have to disagree with jkom51 on the gift tax. According to our CPA and our Estate attorney the gift tax will not be repealed in 2010 the estate tax yes but not the gift tax. Believe me this has been discussed with our CPA as to the best way to legally avoid paying estate taxes. This is some of what our CPA gave me:

"Although the estate tax is being repealed, the gift tax will not be repealed. A $1,000,000. lifetime exclusion from gift tax will be allowed per person, starting in 2002, and the tax rate will be the same as the highest income tax rate in effect at the time the gift is made. In 2010, assuming the estate tax is repealed at that time, the gift tax will be 35 percent. Why wasnt the gift tax repealed along with the estate tax? Congress is well aware that estate planners would welcome an opportunity to shift assets from older to younger generations if there was no gift tax."

One way to avoid or lower the estate tax if the total estate is above the estate tax exemption is to have provision for a by pass, A B trust, written into your trust so that when one trustee passes the other can disclaim half of the estate by putting into an irrevocable trust for the beneficiaries. Estate taxes may be due on that half but any future growth will not have any estate tax due and will pass to the beneficiaries estate tax free. Depending on the year of the final trustees passing the estate tax would not come into play until that years exemption is met for that half of the estate. In 2009 the estate tax exemption will go to 3.5 million. After 2010 its anybody guess. It depends on who is elected our next president and what congress will. They may just leave it at one million.

I wish jkom51 was right. It gets very confusing sometimes separating the estate tax and the gift tax. The gift tax only comes into play and effects the estate tax when you go over the gift tax limits.

    Bookmark   August 23, 2008 at 8:38PM
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I should have said..

The gift tax only comes in to play and effects the estate tax when you go over the gift tax limit and are over the estate tax exemption.

    Bookmark   August 23, 2008 at 9:54PM
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This has nothing to do with the tax situation, but if you're not that financially saavy, and not doing this for estate planning (which you obviously are not, because you would be being advised by a professional who would be answering all your questions)--are you sure giving a child a windfall like that is a good idea?

Look, you don't have to answer me, but I do hope you think a lot about this before you do something that could be bad for both of you. Why are you planning to give a child so much money? Are you being pressured by them? Blackmailed? are they in financial trouble? why? Is this money to be a one-time gift? or are you likely to be hit up for more next month, next year? Will they be responsible with it (saving, economizing, etc?)

Unfortunately, it sounds very fishy to me that you would be giving a child such a huge amount, but not have the resources to find the answers to your questions (if you're really well enough off to afford that kind of gift, wouldn't you have an accountant and possibly a lawyer you could ask?)

Please don't just hand that kind of money over to a child. If they've gotten themselves into a financial bind, you will be enabling them to continue to be irresponsible if you hand over a whopping pile of cash. If they're in trouble, and you want to help, pay a portion of some of their bills, making sure they know they are expected to pay their share (perhaps match whatever they can come up with?)

I'm not posting this lightly. My in-laws, over the years, gave my SIL many tens of thousands of $$$ to bail her out financially. All it did was make her more irresponsible, because she figured that any time she got into difficulties, the Bank of Dad would be there for her. In the end, she felt so entitled, that she finagled a way to get POA over MIL after FIL died, and SIL misappropriated over a quarter of a million $$$ of the money FIL had worked hard for, and had left for MIL's end care (she has Alzheimers). We're 6 years and over $20,000 into that fight--and all we've been able to do is stop the hemmorage of money, there's no way to get back the money the outlaw stole from her own mother. It's gone. I knowthis is an extreme outcome, but it is the sort of thing that can happen when children are handed too much money, and aren't expected to work for what they need, want, wish for.

Please think this through--get all the answers to your tax questions. and do think about how a windfall like that will affect your child--considering both the potential good and bad. And be brutally honest with yourself.

I'll be honest, I don't care how much money I had, I cannot imagine any situation where I would hand over that kind of money to a child. It's not a good precedent, and it's not healthy for them mentally or emotionally.

    Bookmark   August 23, 2008 at 11:02PM
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I totally agree, azzalea, and thanks for sharing your experience. Truth be told, the reason I'm giving the money to her is that I'm trying to get all the money out of my name in case I have to go into a nursing home in the future. I just went through that with her father, and it was a very difficult thing. I can't tell you the amount of tears it caused me. I don't want my children to have to go through that same thing, so I'm going to start now, getting it out of my name. Fortunately, she's very level headed and understands what I went through with her dad. He had dementia and was making all kinds of strange decisions with our savings, for instance, he cashed in his 50K life insurance policy for 5k. I didn't know what he was doing because he became very secretive about it. It was a real mess, but I'm lucky actually. I have a small house, not expensive to heat in the winter!, no mortgage, good kids grown up, good health. What more could I ask for?
Maria B.

    Bookmark   August 24, 2008 at 8:06AM
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Okay, that explains things.

Please, don't do anything, though, until you've consulted an eldercare attorney. There are a lot of laws and regulations that govern what you can and cannot do in that situation. If you don't do it exactly right, you can end up shooting yourself in the foot. We've spoken to an attorney about that sort of thing. It takes years to properly divest yourself of your assets, in a way that you won't be in trouble down the road. Please, please--protect yourself and your child by getting the appropriate professional advice before you take any irreversible steps.

Sadly--and again, I hate to mention this--I've known so many people who have turned assets over to 'responsible' children and ended out in the cold. My mother died last winter. I was talking to the manager of her apt building who was telling me about the new tennant coming. A very sweet lady who had signed her house over to her daughter, who she trusted implicitely, with the understanding that she could live out her days there. and what happened? The daughter totally shunned her in the house--wouldn't speak to her, wouldn't let her eat at the table with the family. The poor woman had no resources at that point and had to go out and get an apt. because life was just unbearable at her own home. The apt. manager was so glad to be able to help the woman--she's such a sweet lady and looks upon her tennants as if they were her own family.

I still think you want to think long and hard, and get the best professional advice before you take the step of giving away a big portion of your resources. Be careful. You should be able to enjoy your money in your old age--yourself.

    Bookmark   August 24, 2008 at 8:20AM
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Maria, I realize that you want to provide for your daughter, but you may - no, make that should - consult with an elder care attorney before gifting all of your assets.

For one thing, I don't know what your health situation is right now, but if you are contemplating having to move to a nursing home in the near future, be aware that Medicaid has a "look back" provision and will seek to recoup your gifts to pay for your nursing home expenses if you are admitted within a certain period of time (It used to be 3 yrs, but I haven't looked at it lately). If it is within that timeframe, then they only allow you to give away a certain amount of money per month to an individual.

Secondly, and more importantly, if you give away your assets and rely on Medicaid to pay your expenses, then you will be limited to only those nursing homes that accept Medicaid. And trust me, they are not the nicest facilities in any community.

Again, I don't necessarily want to dissuade you from your current plans, but I jut think that you need to talk with a professional so that you are aware of the consequences.

    Bookmark   August 24, 2008 at 8:30AM
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The lookback period for divesting one's assets to have Medicaid pick up the nursing home long term care tab is now 5 YEARS. Should you miscalculate, Medicaid will not kick in until the obligatory 5 years is met - ie. you or whomever you transferred your assets to will be paying out of pocket to make up the lookback period difference.

It's always a crapshoot because you can't predict what the future holds.

I agree that an attorney specializing in elder care should be consulted.

Just as an aside, I sometimes wonder if people forget that if one initially enters a long term care facility as a private pay resident, eventually running out of money doesn't mean you'll be kicked to the curb. If you have pensions, survivors benefits, Social Security, etc., those continue to plow into the nursing home to help defray costs for your lifetime. Medicaid picks up the rest - or all -if you have nothing left to contribute to your own maintenance.

    Bookmark   August 24, 2008 at 1:39PM
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Old age is quite depressing, isn't it?

    Bookmark   August 24, 2008 at 4:42PM
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Yes, getting old is definitely not for sissies.

But with a well thought out plan - and a plan that actually gets implemented with good professional assistance - most of the worst case scenarios can be avoided.

    Bookmark   August 24, 2008 at 6:48PM
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I have got a cheque from my father in law by selling his old property so is there would be any tax i have to pay on this gift cheque.

Bill Consolidation

    Bookmark   August 25, 2008 at 10:49PM
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>>Old age is quite depressing, isn't it?We have to remind ourselves that it's a wonderful thing to GET to old age! Many people don't, after all. I always try to remember my oldest sister, who died of ovarian cancer at the age of 38. If she'd lived, I know she'd be stressing out about coloring her gray hairs, LOL!

Getting back to the original thread, partst is correct, and I was wrong, about the gift tax. The political compromise on the gift tax was that rates were permanently lowered to the highest maximum income tax limit. They had previously been as high as 55%, I believe, but have been dropping as an annual percentage as the estate tax limit has increased.

However, since we're in a situation where income tax rates are actually quite low by historical standards, and where analysts have pointed out that neither presidential candidate would be able to balance the budget based on their campaign proposals, we can be pretty sure tax rates are going to go up, certainly on the higher income levels. So this would raise the effective tax rate on any gifts that exceed the $1M maximum exemption.

Whew - doesn't this make you wish for a simplified tax code?!

    Bookmark   August 26, 2008 at 11:07AM
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I like getting older compared to the alternative. ;-) I have found this thread very helpful.

    Bookmark   September 5, 2008 at 10:53PM
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