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.
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.
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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.
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:
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!
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!
