Taxpayer asks:
Recently my father-in-law passed away. My Mother-in-law is planning on selling her home and giving each child $10,000 and then putting the rest in CDs and she is planning on doing this before the end of the year. How will this affect the income tax that we have to pay? My husband says that we do not have to pay income taxes on this. We currently get health insurance through the state, but $10,000 extra would put us over the $50,000 income cap and make us ineligible. Any ideas how to avoid this situation?
Taxgirl says:
Gifts of cash are not taxable to the recipient for federal income tax purposes. So, when your mom writes you a check for $10,000, you don’t have to do a thing except tell her thank you.
If the gift were an appreciated asset, like stock or real property, it would not be taxable to you when you receive it, but there would be a tax consequence when you sell it. You would “carry over” the basis from the donor (in this case, your mother-in-law, and use that to determine any capital gain. That’s not the case here, but just so you know.
There may be a gift tax consequence to your mother-in-law, depending upon her pattern of giving throughout the year. Under the federal gift tax laws, your mother may gift any person $13,000 per year without gift tax consequences. So it sounds like the $10,000 gift is okay – but remember, the $13,000 is the total for the year. If your mother gives you other gifts throughout the year, she’ll want to do some tax planning.
I’m not sure where you live but, like the feds, most states do not include cash gifts as income for income tax purposes. I am, however, not sure whether cash gifts are includible as resources for purposes of state benefits (they are includable in some states for purposes of, say, Medicaid applications). I would highly recommend checking with a benefits representative for your state or your attorney to confirm the specifics.
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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Image courtesy of Wikimedia Creative Commons: Photo taken and released under GFDL by Tristanb.
One of my recent “ask the taxgirl” questions involved whether Michael Jackson’s funeral expenses were deductible. When I paused to consider whether I wanted to post about Michael, a colleague kindly offered to address the issue on his blog at sofloridaestateplanning.com. The blog is authored by David Shulman, an attorney located in South Florida who focuses his practice on Wills, Trusts and Estates, and Tax Planning. David has been blogging other issues related to Michael Jackson, so I was more than happy to defer to him.
So are those expenses deductible? Check out David’s answer over at SoFloridaEstatePlanning.com and see. For the record, I concur with his answer!
Thanks, David!
Taxpayer asks:
Two years ago, I gave my son a considerable amount of money so that he could finish graduate school without having to take out any student loans. Last year, he announced that he was “taking a break” from school. Since he was no longer going to school, I asked him to give the money back. His girlfriend said that they had already used the money to plan their dream wedding.
I am very angry with my son but I do not want to sue him. It is a lot of money at stake. It is my understanding that I can claim this loss on my taxes by issuing him a 1099. How do I do this?
Taxgirl says:
First of all, my sympathies that things didn’t turn out as you planned. I’m not sure, however, that I’m going to be able to make you feel better.
It appears that what you want to do is treat this as a bad debt. I’m not sure that you can do this since I believe it was a gift. A gift gone bad, perhaps, but a gift nonetheless.
In order for a transaction to be considered a bad debt, you have to be able to prove that it was an actual loan. Under the circumstances as you presented them, I don’t think you ever intended for it to be a loan. I think you gave your son some money as a gift (you even wrote “I gave” and not “I loaned”) and he didn’t use it the way that you intended; my guess is that had your son finished school, you would have never asked for the money back.
That is significant because to claim a bad debt on your taxes, you would have to have proof of a loan (which I’m guessing would be difficult) as well as proof that you’ve made reasonable efforts to collect the debt. It’s worth noting that when it comes to transactions between related parties, the level of proof is generally a bit heightened – the IRS tends to believe that undocumented loans between related parties are really gifts.
Let’s say that you can prove that it’s a loan – you have a promissory note or some other evidence. There are still restrictions on the deductibility. If you’re not in the business of making loans for a living, you have what is referred to as “nonbusiness bad debt.” In that case, the debt must be totally worthless to be deductible. If it is, you report it as a short–term capital loss on your form 1040 at Schedule D; note that it is subject to the capital loss limitations.
When you claim the bad debt, you’ll have to attach a statement to your form 1040 that explains:
- A description of the debt, including the amount and the date it became due (if you have a promissory note, that would be best);
- The name of the debtor – you must include an explanation of any familial relationship (in this case, he’s your son);
- Details of the efforts you made to collect the debt; and
- What event caused you to decide that the debt was worthless.
Finally, the 1099. You’re thinking about the form 1099-C that we’ve been hearing a lot about in the news. It’s a form of “discharge of debt.” The intention of the form is to provide relief for financial institutions for debts larger than $600. It is not intended for individuals to use to settle nonbusiness bad debts.
The form is evidence for the recipient (the debtor – in this case, your son) of the amount to report on his or her personal income tax return. It is provided to the IRS because cancellation of debt is a taxable event. It’s worth noting that irrespective of issuing the form 1099, your son would be required to report the amount of the debt forgiveness on his personal tax return.
I would advise you to discuss this matter with your son. If it’s a bona fide loan, then perhaps you should give him another opportunity to repay the loan by explaining to him exactly what his obligations are. If he’s old enough to get married, he’s old enough to act like a grown up. A grown up wouldn’t act this way towards Bank of America or PNC.
If it is actually a gift gone bad, I would explain to your son how disappointed you are that he has chosen to ignore your wishes. Perhaps, after the fact, he would be willing to work out a payment plan with you to return the money – even if it is a gift. I would think it would be important to him to start out this next chapter of his life with the support and respect of those around him – especially from what seems like a pretty good father who was trying to pay for his education. 
All of that said, good luck. I hope it works out for all of you.
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.
Have a question? Ask the taxgirl! – Now on Facebook!
Taxpayer asks:
Hi Tax Girl
Question
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.
Have a question? Ask the taxgirl! – Now on Facebook!
