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.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

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Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.

Comments

  1. Great Post/Answer

    This person has all sorts of issues associated with this situation.
    1) What does state insurance mean? Is it Medicaid or is it a COBRA situation where resources may not matter?
    2) What benefits is mom getting? Because straight gifting may not be the best course of action for her.

    There may be planning options (“avoiding” is a conatation for illegal lol) such as having Grandma pay for certain reasonable expenses. But again, as TaxGirl said TALK TO AN ATTORNEY. If you are on the lower income side I would recommend calling up a law school who may have a free clinic.

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