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Tax Question

New Contributor

Tax Question

My parents are older and looking to down size.    They want to sell their house (paid off)  and give us the proceeds and then 

get a nice small place to live.     They want to do this so we can use the money now and avoid inheritance tax.     Question is

will they have to pay any taxes if they gift the monry to us?     I am so appreciative of what they want to do, but don't want to have

them saddled with any taxe consequences.    Any advice?

Message 1 of 9
8 REPLIES
Moderator

Re: Tax Question

Any money gifted over 14K (2016) from an individual is taxable to you or the donor.  Which sucks.

 

If both of your parents are living, they can double it up to 28K.  My dad is disbursing 14K a year to my brother and I each, which doesn't suck free and clear from taxes I'll admit, and he doesn't live in a state that collects inheritance tax and the federal exemption line is pretty high, way more than most estates are worth.

 

Beyond that you probably need to get creative: there are family loans which can be done, just make sure you follow the IRS interest guidelines and do it in writing legal style (can find templates off Nolo and others) for up to 100K if you need the money now and then your parents can basically just pay off the loan for you at the maximum gift annually though to be legal beagal style you might need to shuffle the 14K back and forth (note: some IRS loans have massive restrictions on them on investment income and similar so look into it carefully), I didn't quite get that far when I looked into it.  I don't personally know any other tricks for doing what you're suggesting without paying a gnarly tax penalty... anything complicated is probably worth talking to an estate planner.

Starting Score: EQ 5 561, TU 98 567, EX 2 599 (12/30/11)
Current Score: EQ 5 771, TU 4 758, EX 2 758, EQ 8 795, TU 8 762, EX 8 786 (7/28/17)
Goal Score:    EQ 5 750, TU 4 750, EX 2 750, EQ 8 800, TU 8 Blah, EX 8 800 (01/01/18)


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Message 2 of 9
Frequent Contributor

Re: Tax Question


busyone wrote:

My parents are older and looking to down size.    They want to sell their house (paid off)  and give us the proceeds and then 

get a nice small place to live.     They want to do this so we can use the money now and avoid inheritance tax.     Question is

will they have to pay any taxes if they gift the monry to us?     I am so appreciative of what they want to do, but don't want to have

them saddled with any taxe consequences.    Any advice?


It really depends on how much they are planning to give:

 

  1. The Federal Estate Tax exemption is also used as the lifetime gift tax exemption and is currently $5.45 Million per decedent.  So while they are alive, your parents can give away a combined $10.9M without having to pay any gift tax.  When they die, they can pass on $10.9M, minus any gifts given when they were alive, tax free.  So people don't really have to worry about Estate Taxes unless the decedent's estate is valued significantly more than $5.45M ($10.9M for married people).
  2. CT has a gift tax with a $2M individual lifetime exclusion.  No other state has a gift tax.

So, your parents will need to pay a Federal Gift Tax on anything above $10.9M minus any gifts they've ever given over the annual exclusion (i.e. $14K per parent for 2016).   

 

If they live in CT, they will have to pay Connecticut gift tax on anything above combined $4M minus any gifts they've ever given over whatever exclusion.

 

Even if they plan to give away less than $10.9M, they still will need to file a Federal (and State, if applicable) Gift Tax return on any amount they give over $28K ($14K per parent) per person even if they won't pay any tax on it.  So if, for example, they give 3 people $200K each, your parents will have to file a gift tax return on ($200K - 28K) x 3 = $516K.  This will reduce their combined lifetime estate exemption to $10.384M.

 

BTW, if your parents are liable for any gift tax and they don't pay it, the recipients are on the hook. 

 

As ever, check the current regulations or with a professional.  Don't just blindly trust what you read on forums.

Message 3 of 9
Frequent Contributor

Re: Tax Question


Revelate wrote:

Any money gifted over 14K (2016) from an individual is taxable to you as income.  Which sucks.

 


This is not correct.  Gifts are NOT considered income and receiver does not have to report on their tax return. 

 

Message 4 of 9
Valued Contributor

Re: Tax Question


tacpoly wrote:

Revelate wrote:

Any money gifted over 14K (2016) from an individual is taxable to you as income.  Which sucks.

 


This is not correct.  Gifts are NOT considered income and receiver does not have to report on their tax return. 

 


Your assumption is not correct - Gifts can be taxable as outlined by the IRS and summarized below (and) correctly by previous posters on this thread. 

 

http://blog.taxact.com/gift-tax-do-i-have-to-pay-gift-tax-when-someone-gives-me-money/

 

https://www.moneyunder30.com/gift-tax

 

http://www.bankrate.com/finance/retirement/know-the-gift-tax-rules-1.aspx

 

 

 

 

Message 5 of 9
Frequent Contributor

Re: Tax Question


pipeguy wrote:

tacpoly wrote:

Revelate wrote:

Any money gifted over 14K (2016) from an individual is taxable to you as income.  Which sucks.

 


This is not correct.  Gifts are NOT considered income and receiver does not have to report on their tax return. 

 


Your assumption is not correct - Gifts can be taxable as outlined by the IRS and summarized below (and) correctly by previous posters on this thread. 

 

http://blog.taxact.com/gift-tax-do-i-have-to-pay-gift-tax-when-someone-gives-me-money/

 

https://www.moneyunder30.com/gift-tax

 

http://www.bankrate.com/finance/retirement/know-the-gift-tax-rules-1.aspx

 


Where in the links you provided does it say that the receiver has to report a gift as taxable income in their income tax return?  In fact, those links mostly address the tax consequences for the giver.  The giver is the one who needs to file the gift tax return and paying the gift tax if necessary (see my first post above). 

 

http://www.nydailynews.com/new-york/money-pros-large-cash-gift-considered-income-reported-irs-articl...

 

4th bullet from the bottom:

https://turbotax.intuit.com/tax-tools/tax-tips/Taxes-101/What-Is-Taxable-Income-/INF15613.html

 

And finally, the actual relevant source, see p.32 middle column of Publication 525 of the IRS:

https://www.irs.gov/pub/irs-pdf/p525.pdf

 

"Gifts and inheritances.   In most cases, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you."

 

Message 6 of 9
Valued Contributor

Re: Tax Question

 

 

 

 

Message 7 of 9
Frequent Contributor

Re: Tax Question


pipeguy wrote:

 

 

 

 


You jumped on and started criticising me without understanding my post to Revelate.  I am not fighting the notion that a GIFT TAX may be imposed on gifts over a certain amount -- read my first post on the gift tax!  What I am saying is that Revelate is WRONG in stating that the RECEIVER must pay INCOME TAX on the amount above $14,000.  Gifts are not income.  I posted a link to the IRS document/regulation that proves my position.  Post the regulation that says that gifts (and don't put it in quotes, gifts are specifically defined for tax purposes) are subject to income tax. 

 

This is not semantics and you know it (or maybe you don't).  The IRS differentiates between INCOME TAX and GIFT TAX -- for one thing, the rate is different, for another, it's a completely different form that gets filled out. 

 

 

Message 8 of 9
Highlighted
Moderator

Re: Tax Question


tacpoly wrote:

pipeguy wrote:

 

 

 

 


You jumped on and started criticising me without understanding my post to Revelate.  I am not fighting the notion that a GIFT TAX may be imposed on gifts over a certain amount -- read my first post on the gift tax!  What I am saying is that Revelate is WRONG in stating that the receiver must pay INCOME TAX on the amount above the $14,000 gift tax exclusion.  Gifts are not income.  I posted a link to the IRS document/regulation that proves my position.  Post the regulation that says that gifts (and don't put it in quotes, gifts are specifically defined for tax purposes) are subject to income tax. 

 

This is not semantics and you know it (or maybe you don't).  The IRS differentiates between INCOME TAX and GIFT TAX -- for one thing, the rate is different, for another, it's a completely different form that gets filled out. 

 

 


It would've been helpful to put a little more detail in it than to say it's not taxable Smiley Happy.

 

That "traditionally the donor pays" in IRS land, I did miss that verbiage before, somehow, when I looked at this a while back (5ish years ago when I looked at details).  Where did you see the tax rate is different if the receiver is paying it though?  I'll have to look more. 

 

Either way you have legit points, and I was wrong on some of my information.

Starting Score: EQ 5 561, TU 98 567, EX 2 599 (12/30/11)
Current Score: EQ 5 771, TU 4 758, EX 2 758, EQ 8 795, TU 8 762, EX 8 786 (7/28/17)
Goal Score:    EQ 5 750, TU 4 750, EX 2 750, EQ 8 800, TU 8 Blah, EX 8 800 (01/01/18)


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