taxgirl » estate & gift

Ask the taxgirl: Income Tax on Gifts

Kelly — Sat, 25 Jul 2009 12:33:11 +0000

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.
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Ask the taxgirl: Michael Jackson’s Funeral

Kelly — Wed, 08 Jul 2009 16:36:17 +0000

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!Similar Posts:

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Ask the taxgirl: Cancellation of “Debt”

Kelly — Sun, 31 May 2009 12:45:49 +0000

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.

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Ask the taxgirl: Income Tax Consequences of a Gift

Kelly — Mon, 04 May 2009 11:43:22 +0000

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.

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Ask the taxgirl: Gifts to Children

Kelly — Thu, 16 Apr 2009 00:59:00 +0000

Taxpayer asks:

7 years ago when I divorced I spent alot of the money I received on my children. Now I read that maybe I could have used the money as a deduction on my taxes. One I bought a $16,000. mobile home, the other I paid off a $10,000 credit card bill. Can I go back or do these items not count? Thank you.

Taxgirl says:

As a mom, I totally get that you wanted to help out your children. And if it made you happy, then it was the right thing for you to do. But with respect to income taxes, it won’t help you.

The only real tax consequences here might be gift taxes – the mobile home for your one child exceeds the annual exclusion for the year (depending on the year in which you made the purchase, that amount was between $10,000 and $13,000). It’s likely not that big a deal here since you have a lifetime gift tax exclusion of $1 million. So, I’m not worried (though if you’ve made a habit of buying pricey things for your children you might want to double check with a tax pro).

But deductions? Nope. Not for these things. Tell your kids they owe you big – and I hope they were truly appreciative of your generosity.

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Federal Estate Tax Makes News Again

Kelly — Sat, 04 Apr 2009 12:45:26 +0000

Remember years ago when there was a lot of buzz about the federal estate tax “repeal” set to take place in 2010? It’s still law. But the thing that Congress didn’t make quite so public is that the repeal only lasts for one year. One. After 2010, the federal estate tax rolls back in at its pre-legislative limits. The exemption drops back to $1 million per individual and the old rates apply.

Most tax pros expected to see Congress address this issue much earlier. After all, Congress had nearly 10 years to do something about it. Only they didn’t. Rather than work on a compromise bill, Congress did a few years of the back and forth “all or nothing” nonsense that generally results in, well, nothing. When Sen Bill Frist (R-TN) became Majority Leader of the Senate in 2003, he pledged to make repealing the federal estate tax a top priority… and then a little something happened on March 20, 2003. The US went to war in Iraq.

The war in Iraq cost a lot of money. A lot. Estimates are that the war cost the US almost $3 trillion. Suddenly, with increased expenditures, support for tax cuts for the wealthiest 2% of Americans wasn’t quite as popular as it had been. Frist never pursued the repeal and other proposals to eliminate or drastically repeal the bill fizzled.

Five years later, the economy is even more damaged than before. Unemployment is creeping closer to 10%, the Dow has declined significantly since its heyday, foreclosures are up and home sales are down. It is, then, perhaps not the best time from a political to talk estate tax reductions. But now, Congress has little choice.

President Obama is well aware of the political dangers inherent in this one. Interestingly, while very few Americans are actually affected by the federal estate tax (currently, the tax does not apply to decedents with less than a $3.5 million taxable estate or $7 million for a married couple), it’s a hot button issue. Many Americans relate to the idea of a “death tax” whether they’d be affected or not.

With that in mind, President Obama has proposed freezing the federal estate tax at the 2009 level (again, exempt for individuals with less than a $3.5 million taxable estate or $7 million for a married couple). At that level, it’s estimated that only about three-tenths of one percent of estates will be taxable.

Some Senators are clamoring for repeal. But most have decided that it’s not a battle worth fighting; with less than 1% of taxpayers affected, there are more popular tax concerns that the estate tax repeal. Instead, there are indications that the GOP will present a counter proposal of a $5 million exemption ($10 million for a married couple) with lower marginal tax rates.

It will be interesting to see what happens going forward. If the economy turns around more quickly, it will certainly change the equation but not to the point of repeal. Most of us who have watched the repeal argument ebb and flow since the Clinton days (when the exemption was a mere $600,000) don’t expect a repeal under this administration – quite frankly, I didn’t expect one under the last either. The tax may change over the next few years but it’s not going anywhere.Similar Posts:

Ask the taxgirl: Wills and Taxes

Kelly — Thu, 15 Jan 2009 12:45:37 +0000

Taxpayer asks:

I’ve been trying to get my parents to make a Will. I’m now there only living child. My parents have told me everything goes to me. They have been told by a friend that if they make a Will & leave me everything including there house that when they die I will have to pay taxes from the date they signed there Will. Is that correct?

Taxgirl says:

Nope, not even close.

An estate is taxed as of the date of death, not as of the date of signing a Will.

The lack of a Will does not result in a lesser tax burden. Similarly, any scheme to avoid probate (such as simply funding a revocable trust) does not relieve the estate of a tax burden. In fact, without any planning, your parents’ estate will likely be subject to estate and/or inheritance taxes depending on your state of residence and the size of their assets. A good estate planning attorney will be able to create a strategy to help save on taxes and not the other way around.

And last word? Irrespective of taxes, absolutely everyone should have a Will. It doesn’t matter how much or how little you own. Really.

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Ask the taxgirl: “Buying” the family home at discount

Kelly — Wed, 19 Nov 2008 16:10:47 +0000

Taxpayer asks:

My father wants to sell me his house (approx. value of $300,000) for what he owes on it ($54,000). I know, a pretty sweet deal. Some friends advised him that the best way to do this is simply to “give” me the house, and I will send him a Christmas card with $54,000 in it. What is the best way to complete this transaction when it comes to taxes. The house is located in Florida.

Taxgirl says:

This question has lots of layers… So, I’ll start off my re-emphasizing that you should consult with your tax professional – there is a lot of information outside of this transaction (such as your father’s estate planning situation) that will affect the outcome.

But here is the basic result: Your father is making a gift to you in the amount of $246,000. A below market sale is generally considered a gift to the extent of the difference between fair market value and the “selling price” – in your case, $300,000 (FMV) – $54,000 (purchase price) = $246,000 (gift). Since your father is entitled to give you $12,000 per year without any consequences, the taxable value of the gift for federal gift tax purposes is $12,000 less, or $234,000.

With that, I differ with your friends as to the best way to complete the transaction. If your father and you are both in agreement that this is a sale for $54,000, then treat it like a sale – none of this cash in the envelope nonsense. If you attempt to hide the sale price, it may be difficult for you to later prove that the entire $300,000 was not a gift. The amount of the gift is important for estate and gift tax purposes. Additionally, if you treat the whole thing as a gift and you “gift back” $54,000, you’re just complicating the situation. You can read more about what gift tax is at my prior post.

As far as income tax goes, assuming that there’s nothing strange about the mortgage, etc., the sale should not result in federal income tax consequences. There should be no capital loss or gain.

And here’s where I’m a lawyer and tell you some “buts”…

Your father’s estate could be affected by the gift, depending on his health and financial situation. Even if he’s not subject to federal estate tax, making gifts may affect Florida Inheritance Tax, so be sure and check that out.

Any claims for Medicaid or other government assistance made by your father could also be affected by such a gift.

There are also basis issues for you to consider. The FMV of the property, the donor’s basis and the value of the gift will all affect your basis for purposes of future sale. You’ll want to run that information by your tax professional.

See what you get for asking a lawyer?

Seriously, while the transaction feels simple, it may not be, taking into consideration the bigger picture. Since the amount of the gift is significant, I’d check your tax professional before moving forward, just to make sure there are no surprises. There may even be a better way to structure the transaction, depending on your circumstances.

Good luck – and enjoy your “new” home!

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Ask the taxgirl: Forms 1099 and Estates

Kelly — Thu, 31 Jul 2008 11:56:40 +0000

Taxpayer asks:
My father my grandmother and (unofficially) I, are administers of a simple (non trust) estate for my recently deceased Uncle. the estate has hired an attorney, a funeral home, a grave tending service, and a guy to help clean the house he lived alone in, and sell personal property contained in the house. All of these payment exceed $600. Do i neeed to get each contractor to fill out a w-9 and then submit a 1099 to the IRS-and to the payee?

This is the relevant statute and reuglations and why I dont think we need to send 1099’s as part of the estate.

26 USC section 6041:

(a) Payments of $600 or more.–All persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income (other than payments to which section 6042(a)(1), 6044(a)(1), 6047(e), 6049(a), or 6050N(a) applies, and other than payments with respect to which a statement is required under the authority of section 6042(a)(2), 6044(a)(2), or 6045), of $600 or more in any taxable year, or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for, shall render a true and accurate return to the Secretary, under such regulations and in such form and manner and to such extent as may be prescribed by the Secretary, setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment.

relevant IRS regulation:

26 CFR 1.6041-1 Return of information as to payments of $600 or more.

(a) General rule–(1) Information returns required–(i) Payments required to be reported. Except as otherwise provided in §§ 1.6041-3 and 1.6041-4, every person engaged in a trade or business shall make an information return for each calendar year with respect to payments it makes during the calendar year in the course of its trade or business to another person of fixed or determinable income described in paragraph (a)(1)(i)(A) or (B) of this section. For purposes of the regulations under this section, the person described in this paragraph (a)(1)(i) is a payor.

(A) Salaries, wages, commissions, fees, and other forms of compensation for services rendered aggregating $600 or more.

(B) Interest (including original issue discount), rents, royalties, annuities, pensions, and other gains, profits, and income aggregating $600 or more.
(b) Persons engaged in trade or business–(1) In general. The term “all persons engaged in a trade or business”, as used in section 6041(a), includes not only those so engaged for gain or profit, but also organizations the activities of which are not for the purpose of gain or profit. Thus, the term includes the organizations referred to in section 401(a), 501(c), 501(d) and 521 and in paragraph (i) of this section. On the other hand, section 6041(a) applies only to payments in the course of trade or business; hence it does not apply to an amount paid by the proprietor of a business to a physician for medical services rendered by the physician to the proprietor’s child.

The phrase is thus never defined by statue or by regulation except to say that non profits count (like 501c’s and others). It also says why a doctor is not given a 1099 when the owner of a business goes to the doctor. This is the reason.

I don;t think there is any legal reason to think that an estate is what is being meant here. I would think that an estate, which is a temporary entity that only exists in order to distribute assets of the decedent-is not “engaged in a trade or business”

What do you think?

Taxgirl says:
Wow. That’s a well researched question! And I’m going to agree with you.

My reason is that while an estate is a separate taxable entity, I think that it continues the “life” of the decedent. Unless, the estate is actively engaged in a trade or business, then I think that it’s acting in the shoes of an individual. In that case, and under these circumstances as you’ve outlined, no form 1099 needs to be issued (there are some circumstances, such as payments to an administrator for services that are treated differently).

If any of my colleagues think differently, please chime in!

For more information about form 1099s, see my prior post about various forms.

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Ask the taxgirl: Income v Inheritance Tax

Kelly — Fri, 20 Jun 2008 19:17:11 +0000

Taxpayer asks:

I recently inherited a substantial (for me) amount of money. I used it to buy a home and to pay off some bills. I have been told I will have to pay inheritance tax and I have also been told it would not be inheritance tax, but income tax I will owe on this. Which tax would I pay? and approximately how much? I’m looking for a (ballpark) percentage. The amount was just over $100,000. I invested some in a money market CD to help with taxes. Is it enough?

Taxgirl says:

With that amount, you would not be subject to federal estate tax. You may be subject to state inheritance tax, depending on where you live.

The rules for inheritances vary from state to state – and there is no percentage that I can even ballpark. Some states like Pennsylvania tax at different rates depending on your relationship to the decedent. Others tax a flat rate. I would strongly recommend that you contact an attorney.

With respect to the income tax, generally inheritances are not subject to income tax. That said, it depends upon the nature of the inheritance. Tax-deferred assets or assets that carry income (retirement plans or certain trusts, for example) would have an income tax component.

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