The federal income tax is one of the most complicated innovations in human history. However, we’re going to try and simplify the whole enchilada with this handy federal income tax guide.
Use it as a reference to help you prepare your tax return. It’s a “high altitude look” at dozens of tax issues, just to keep you on track.
You’ll need to do a deep dive to get more information if anything about your tax situation is the least bit unusual.
2023 Tax Guide
We’ve summarized the information presented in the IRS’s 1040 and 1040-SR Instructions booklet, published in November, 2022.
Do You Need to File a Tax Return?
If you don’t know if you’re required to file an income tax return, you can use the IRS Do I Need to File a Return tool.
But, here are the general requirements:
You are required to file if your income exceeds the following limits for 2022:
- Single, under 65 – $12,400
- Single, 65 or older – $14,050
- Married filing jointly, both spouses under 65 – $24,800
- Married filing jointly, one spouse 65 or older – $26,100
- Married filing jointly, both spouses 65 or older – $27,400
- Married filing separately, any age – $5
- Head of household, under 65 – $18,650
- Head of household, 65 or older – $20,300
- Qualifying widow(er), under 65 – $24,800
- Qualifying widow(er), 65 or older – $26,100
You will still need to file a tax return if any of the following apply:
- You had at least $400 in self-employment income. This will also extend to freelancers, people with side businesses, and anyone who engages in gig work.
- You owe household employment taxes.
- Social Security and Medicare taxes owed on unreported tip income.
- You received a distribution from a retirement plan, medical savings account (MSA) or a health savings account (HSA).
- You received an advance payment on the Premium Tax Credit.
- Expect to qualify for the earned income tax credit (EIC).
- If you may be subject to the alternative minimum tax.
- You want to claim a refundable Health Coverage Tax Credit.
- You had wages of $108.28 or more from a church or qualified church-controlled organization exempt from employer Social Security and Medicare tax.
How to Determine Your Tax Filing Status
There are five basic tax filing statuses.
This is your tax status if you are not married – or legally separated – as of December 31 of the tax year.
Married filing jointly (MFJ)
This is generally the most beneficial filing status, since it offers lower tax brackets and a higher standard deduction. You’re eligible if you’re married as of December 31 of the tax year.
Married filing separately (MFS)
This will usually result in higher tax liability. But, there are times when it makes sense. This can happen when one partner is self-employed and makes much less money than the other. It can also make sense if one partner has a much higher level of deductible itemized expenses. You may also want to file separately if you lived apart during the year.
Head of household (HOH)
You can claim this status when you are a single taxpayer, legally separated, or when your spouse didn’t live with you during the second half of the tax year. But, here is the determining factor: you must have a qualifying child or dependent for which you paid at least half of their support.
You don’t qualify for this status if you are otherwise married, or your spouse spent even one night in the same residence as you. You may need to provide specific documentation to prove the status (separation agreement, evidence of separate residences, documentation that you provided more than half of the dependence support).
You must have a qualifying dependent to be eligible for the status. It enables you to have the same tax benefits as if you are married filing jointly. You are only eligible for this status in the year in which your spouse died, and the following year.
Tax Preparation Considerations
DIY Tax Preparation
Millions of people are now preparing and filing their own tax returns. This is easier to do than ever, since there are so many affordable tax preparation software packages. Even if you don’t know much (or anything) about preparing taxes, most are incredibly user-friendly.
All you need to do is gather your information and put the required numbers in the boxes.
If you decide to DIY your taxes this year, you’ll have no shortage of tax software options. The key is finding the best price and features for your needs.
We’ve compiled our list of the best tax software, and these programs top the list:
CPA vs. Enrolled Agent (EA)
If you still don’t feel comfortable preparing your own taxes, or if your tax situation is incredibly complicated, you can use a tax professional. The two most reliable preparers are certified public accountants (CPA) and enrolled agents (EA).
A CPA is a professionally licensed accountant who works in public accounting and usually prepares income taxes. To get licensed, CPAs must pass a rigorous multi-day examination, and meet certain state-issued education and experience levels. CPAs are best for people who have the most complicated tax returns.
EAs aren’t accountants (or CPAs), but they’re licensed to prepare taxes, and represent their clients before the IRS. EAs generally charge lower preparation fees than CPAs.
A Tax Filing Checklist
No matter how you decide to prepare your taxes, you’ll need to assemble all the documents needed. Having them available will make the entire preparation process much easier.
The most basic information you need to have available includes:
- Social Security numbers for each member of your household
- Complete copies of the prior year’s income tax returns (you’ll need these to provide any carryforward information)
- Income information for your dependent children
- Home office information (if you plan to take the deduction) – square footage of your office, and of your home
- Your ex-spouse’s Social Security number if you receive or pay alimony or child support
- Marketplace exemption certificate, if you received an exemption from your state’s health insurance exchange
- W2s from any employment sources
- 1099-MISC for additional income for which income taxes were not withheld (like contract income)
- 1099s reporting Social Security income, interest, and dividends; pension, IRA or annuity income; state income tax refund or unemployment insurance; or reporting the sale of stock or other securities
- K-1’s reporting partnership or S-Corporation income
- W-2G reporting gambling winnings (you should also have records proving gambling expenses)
- Documentation of alimony received, including the Social Security number of the payee
- If you’re self-employed, a complete accounting of all your business income
- Evidence of rental income received if you own investment property
Documents for Reporting Expenses
Potentially tax-deductible expenses are reported on the following documents:
- 1098 reporting mortgage interest and property taxes paid, educational expenses, and student loan interest paid
- Statements from charities reporting contributions
- 1095-A, 1095-B, or 1095-C, reporting health insurance premiums paid, and to whom
- Various forms 5498 reporting IRA, HSA or ESA payments made during the year
There are a lot of situations involving tax-deductible expenses that are not neatly reported on a government form from third-party sources.
You may also need documentation for the expenses in the following section.
Expenses That May Require Additional Documentation
- Documentation of all self-employment expenses
- Expenses for rental property
- Documentation for the purchase of depreciable assets for business or investment activity
- Property taxes paid but not reported on Form 1098 by a lender
- Federal and state-estimated tax payments made for the tax year
- Cost basis of investments sold (if the information is not provided by a broker)
- Indirect expenses related to investment activity
- Documentation of alimony paid
- Receipts from the purchase of energy efficient equipment installed in your home
- Charitable contributions made but not reported by the receiving organization
- Mileage driven for business, employment, medical or charitable activities, as well as records of payment for tolls, parking, and ad valorem taxes
- Evidence of payment of health insurance, out-of-pocket medical, dental and vision expenses, medical mileage, and long-term care insurance
- Childcare expenses paid, if not supplied by the provider (including the provider’s tax ID number)
- Wages paid to a domestic care provider, including that provider’s tax ID number
- An itemized list of higher education expenses paid out-of-pocket, with documentation
- Cost of preparation of last year’s income tax returns
- Sales tax paid on major purchases
Federal Income Tax Rates for 2022
|Tax Bracket / Filing Status||Single||Married Filing Jointly or Qualifying Widow||Married Filing Separately||Head of Household|
|10%||$0 to $9,875||$0 to $19,750||$0 to $9,875||$0 to $14,100|
|12%||$9,876 to $40,125||$19,751 to $80,250||$9,876 to $40,125||$14,101 to $53,700|
|22%||$40,126 to $85,525||$80,251 to $171,050||$40,126 to $85,525||$53,701 to $85,500|
|24%||$85,526 to $163,300||$171,051 to $326,600||$85,526 to $163,300||$85,501 to $163,300|
|32%||$163,301 to $207,350||$326,601 to $414,700||$163,301 to $207,350||$163,301 to $207,350|
|35%||$207,351 to $518,400||$414,701 to $622,050||$207,351 to $311,025||$207,351 to $518,400|
|37%||Over $518,401||Over $622,051||Over $311,025||Over $518,401|
Standard deduction has increased. For the 2022 tax season, they’ve increased a bit to $12,400 for singles and married filing separately, $24,800 for married filing jointly, and $18,350 for heads of household.
Form 1040 only for most taxpayers. Another reminder that has been in place since 2018: 1040A and 1040EZ have been eliminated.
For the 2022 tax season, tax rates are the same but income brackets have changed slightly to account for inflation.
Also, there are changes for deductions that you are able to claim on your 2022 taxes. The CARES Act has a provision that enables taxpayers to deduct up to 100% of your adjusted gross income. Contributions in excess of this amount can also carry over into the 2022 tax season.
Also related to the CARES Act are Paycheck Protection Program (PPP) loans. If you’re a small business owner, you should be aware that expenses you paid with money from those loans cannot be claimed as a deduction.
Tax Accommodations Related to COVID-19
During 2022, two rounds of economic stimulus payments were issued — $1,200 per adult (and $500 per child under age 17) early in the year under the CARES Act, then $600 per adult (and child under 17) in December.
You’ll be glad to know that this income is not taxable, and does not have to be included on your 2022 1040.
If you did not receive one or both payments in 2022, but you were eligible, you can file for a Recovery Rebate Credit on your tax return. You’ll be able to claim this credit if you were a US citizen or resident alien in 2022, have a valid Social Security number, and were not listed as a dependent of another taxpayer.
Changes for Families
Lower medical expense deduction threshold. If you itemize your deductions, you could have deducted unreimbursed medical expenses that exceeded 10% of your adjusted gross income in 2019. For 2020, this number is back to 7.5%, the same amount as 2018
The “Kiddie Tax”: If your child has unearned income in 2020, it will be taxed as follows:
- The first $2,200 in unearned income by the minor is tax-free
- Above $2,200 is taxed at the tax rate for estates and trusts, not the parent’s rate, unless a special election is made
The child must be either under 18 years old, or a full-time student between 19 and 24 years old.
Changes for Small Businesses
2020 has been a year full of tax changes for small businesses as the federal government has worked to create tax breaks that help small business owners navigate the pandemic.
First up, the Paycheck Protection Program. Remember, this provides businesses with up to eight weeks of funds for payroll or expenses such as mortgages or rent. These loans will be fully forgiven if borrowers follow the eligibility for forgiveness, and cancelling the debt will not translate into taxable income.
Qualified Business Income Deduction for 2020
If you have a small business, you may be able to deduct up to 20% of your qualified net business income. The deduction also applies to qualified real estate investment trust dividends and qualified publicly traded partnership income.
But be aware that the deduction phases out beginning at an income of $163,300 and phasing out completely at $213,300 if you are single, and between $326,600 and $426,600 if you are married filing jointly.
Changes to Mileage Allowances
Mileage allowances increased. The mileage allowances for 2020 are as follows:
- Business mileage – 57.5 cents per mile
- Charitable mileage – 14 cents per mile
- Medical and moving mileage – 17 cents per mile
Income Thresholds for the Alternative Minimum Tax (AMT) Increase
The AMT is a special tax provision designed to prevent high-income taxpayers from avoiding taxes through tax breaks. Those breaks can be either preferential income sources or excessive deductions.
It imposes a higher tax rate on your income with the preference items added back.
The income threshold was increased for 2019, removing the AMT threat from many middle and upper-middle income taxpayers. The income thresholds are as follows:
- Married filing jointly and surviving spouse – $113,400 (exemption phase-out begins at an income of $1,036,800).
- Single – $72,900 (exemption phase-out begins at an income of $518,400).
- Married filing separately – $56,700 (exemption phase-out begins at an income of $518,400).
No Change in the Net Investment Income Tax (NIIT)
The Net Investment Income Tax, or NIIT is another provision of the Affordable Care Act. Since 2010, the NIIT extends the Medicare tax at a rate of 3.8% to investment income for those with certain high-income levels.
For 2020, those income thresholds are as follows:
- Married filing jointly – $250,000
- Married filing separately – $125,000
- Single – $200,000
- Head of household – $200,000
- Qualifying widow(er) with dependent child – $250,000
If your adjusted gross income exceeds these levels, the tax will be applied to net income from rents, royalties, interest and dividend income, capital gains, and annuities.
The Net Investment Income Tax will also apply to any passive income from your trade or business, so be sure to factor those ventures in.
Tax Deductions and Credits
The standard deduction for 2020 is as follows:
- Married filing jointly and surviving spouses – $24,800
- Heads of household – $18,650
- Single, or married filing separately – $12,400
You can itemize your deductions if they exceed the limits above. Itemized deductions include medical expenses (in excess of 10% of your AGI). Taxes (state, local, real estate, and sales taxes) and mortgage interest are subject to the limitations discussed earlier, and charitable donations are still fully deductible.
The phase-out for itemized deductions that used to apply to high income taxpayers has been eliminated.
That means there is no longer a limit on how much you can deduct.
In addition to standard deductions and itemized deductions, the IRS has dozens of credits that directly reduce your tax liability.
Some of the more popular tax credits include:
Child tax credit. The credit is $2,000 for 2020. It’s subject to being phased-out, beginning with a modified adjusted gross income of $200,000, or $400,000 if married filing jointly. You can take the credit for up to $1,400 per child even if you have no tax liability (this is what a “refundable credit” means — it’s refundable even if you don’t owe any taxes).
Earned income tax credit (EIC). The earned income tax credit is generally available for low income taxpayers.
It’s based on adjusted gross income, earned income, and investment income.
Education credit. The education credit is for expenses related to higher education.
Child and Dependent Care credit. The child and dependent care credit applies to dependents under age 13. It’s also available for the care of a spouse or dependent of any age who is incapable of taking care of themselves. It provides a credit of up to 35% of the qualifying expenses, based on adjusted gross income.
Savers Tax credit. The savers tax credit applies if you make contributions to a retirement plan. The credit can be as high as $2,000 for single filers, and $4,000 if you’re married filing jointly. The income thresholds are fairly low, but it’s worth applying for if you make a retirement contribution and you have a moderate income.
Tax Deductions and Credits for Small Business Owners
Generally speaking, any expense that’s used in the production of self-employment income is tax-deductible.
The most typical self-employed business expense deductions include:
- The cost of inventory sold
- Expenses connected with the rent, ownership, and operating of business property
- Business use of your home, if any
- The costs and expenses for vehicles purchased by and for your business
- Costs and expenses of equipment purchased for your business (Note: you can deduct up to $1 million paid for business equipment under Section 179 depreciation in the year of purchase)
- Expenses related to the business use of a personal vehicle
- Sales, marketing, and advertising costs
- Legal and professional fees
- Business-related education costs
- Start-up costs (usually amortized or depreciated over several years)
- Business insurance premiums paid
- Interest on business-related loans
- Travel expenses for business purposes
- Meals and entertainment (subject to a 50% limit)
- Phones and Internet usage
- Postage and delivery costs
- Miscellaneous office and business expenses
- Contributions to self-employed retirement plans – IRA, Solo 401(k), SEP, or SIMPLE IRA
Keep accurate records of all business-related expenses throughout the year so that you can take advantage of any that apply to you.
Tax Deductible Medical Expenses
There are two ways that you can deduct medical expenses:
By itemized deduction. If you itemize your deductions, you can write off medical expenses.
But, there is a catch – they are only deductible to the extent that they exceed 7.5% of your adjusted gross income (AGI).
If your AGI is $100,000, then you will only be able to deduct medical expenses to the degree that they exceed $7,500.
Medical expenses can include:
- Premiums paid for health insurance (not as part of an employer-sponsored plan), including Medicare premiums (if you’re self-employed, you can deduct the full amount of health insurance premiums paid, without having to itemize deductions)
- Out-of-pocket costs for medical, dental, and vision
- Uncovered medical expenses
- Prescription drugs not covered by insurance
- Medically necessary travel expenses
- Medical mileage
- Deductibles and copayments
- Premiums paid for long-term care insurance
Paying through a Health Savings Account (HSA). You can set up an HSA either through your employer or on your own through a bank. By paying medical expenses (not including insurance premiums) through the account, you can deduct up to $3,550 if you’re single, and up to $7,100 if you’re married, filing jointly.
You don’t need to itemize your deductions to take advantage of this program.
Tax Deductions for Charitable Deductions, Including Clothing
You can deduct charitable contributions, but only if you itemize your deductions. Cash donations are easy enough to prove.
You’ll typically get a statement from the charity acknowledging how much you’ve contributed throughout the year. If not, you can use copies of canceled checks or other written evidence of your contributions.
Less certain is donations of items, like clothing. It’s common for people to give clothing donations to organizations like Goodwill and the American Kidney Association.
When you do, you can estimate the value of the items given, unless the organization provides you with some sort of written evidence.
You can list the items donated, and use different estimates of value. One of the most common is what is referred to as Thrift Shop Value.
You can do this on items totaling up to $500. If the value is higher than $500, you’ll need to file IRS Form 8283, Noncash Charitable Contributions.
New for 2020: You can now deduct up to $300 for charitable contributions even if you don’t itemize your deductions on Schedule A. You can take the deduction on line 10b of Form 1040, but be aware that the deduction is limited to $150, if you are married, filing separately.
Mortgage Interest Deduction
As in 2019, the mortgage interest deduction will be limited to loans up to $750,000, or $350,000 for married filing separately.
Under the old tax law you could deduct interest paid on mortgage indebtedness on loans up to $1 million. You can continue deducting mortgage interest on up to $1 million of indebtedness on loans taken before December 15, 2017.
But any new indebtedness will be subject to the new limits.
Deduction for State Income, Real Estate, and Sales Tax
For 2020, your deduction is limited to $10,000 if you are married filing jointly, or $5,000 if you’re married filing separately.
The deduction limit applies to all state and local taxes paid, not to each tax type individually.
Tax Gift and Inheritance Rules
IRS Gifting Rules
A major area of confusion with gift taxes is who pays it?
It would seem logical that the recipient of the gift pays the tax, but that’s not how it works. Under IRS regulations, it’s the giver of the gift who pays the tax.
Generally speaking, the gift tax comes into the picture only when you are transferring money to someone other than your spouse. It often applies when you’re transferring money to your children. Most people won’t be affected by the gift tax, which is also closely tied to the estate tax.
For example, for 2020, taxpayers have a lifetime exclusion of $11.58 million, or $23.16 million for married couples. The tax is only applicable on amounts that exceed that limit.
For 2020, you can gift up to $15,000 without incurring the gift tax. If you exceed that amount in any given year, you can apply the gift as a reduction of your lifetime exclusion.
This can be done by filing IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, which will apply the excess against your lifetime exclusion.
Understanding Estate/Inheritance Tax and Inherited IRA Rules
Estate tax – a.k.a., inheritance tax– is closely tied to gift taxes (gifts are essentially an advance on an inheritance).
Much like the gift tax, they don’t apply to money inherited by your spouse, but can apply to your children.
Once again, they are due only on estates with a value of more than $11.58 million (for 2020) or $23.16 million for married couples.
The estate tax – sometimes known as the death tax– can be as high as 40% of the estate transferred, beyond the lifetime exclusion. But again, because of the exclusion, it won’t apply to most people.
Inherited IRAs – There are special rules for these accounts. When a spouse inherits an IRA, it’s subject to required minimum distributions (RMD) after age 70 ½. But, if an IRA is inherited by children or grandchildren, the rules are different.
You’ll have to begin taking IRA distributions in one of the following two ways:
- Taking distributions over five years, sufficient to empty the account, or taking annual distributions, determined by the beneficiary’s life expectancy.
- The second method will preserve the account for the beneficiary’s lifetime and enable continued accumulation of tax-deferred investment income.
Should You Do a Charitable Remainder Trust?
This is a type of trust that provides you with a reliable stream of income for the rest of your life. It’s also an irrevocable trust, which means that once it’s established, it cannot be revoked.
A charitable remainder trust (CRT) has certain tax advantages. The income that it generates is not subject to income tax, unless it has unrelated business income. You can transfer appreciated assets into the trust where they can be liquidated.
No capital gains tax will apply. Funds will become taxable only when they are distributed to you in accordance with the payout plan set up for the trust.
A CRT can also be a benefit if you have a large estate that may be subject to estate tax.
The transferred funds reduce your estate, and thereby the tax that may apply upon your death. CRTs are complex legal arrangements that will require the services of an attorney.
Tax Considerations for Your Children
Custodial Accounts for Minors – UGMAs and UTMAs
Many parents want to create savings and investments for their children. But, minors are not legally capable of owning accounts.
The workaround for this limitation is to set up an account under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA).
With one of these accounts, you act as custodian, then the account transfers to your child once they reach the age of majority.
You can set up one of these accounts in all types of financial institutions, including banks and brokerage firms.
There is no ceiling on how much you can contribute, but most parents limit contributions to $15,000 to avoid the gift tax.
The money in the account can be used for any purpose related to your child.
This eliminates the restriction that funds be used strictly for education, as is the case with 529 plans and education savings accounts (ESAs).
If you have children, you’ll want to check out the 529 College Savings Plan.
There’s no immediate tax benefit to you as the contributor to the plan.
But the 529 Plan does allow for tax-deferred accumulation of investment earnings that will enable you to save for your childrens’ college education.
You invest money primarily in mutual funds, and the funds can be withdrawn tax-free when taken for qualified education expenses.
In this way, you get an important tax break on the back end when the funds are withdrawn. 529 plans are administered by each individual state.
Check and see the details of the plan available in your state.
Tips to Pay Your Taxes
Paying Taxes on Earned Income
If you’re paid by salary, taxes will be withheld and paid to the IRS for you. But, if you’re self-employed or a contractor, you’ll need to set up estimated tax payments.
To do that, you’ll first have to make a reasonable estimate of the income you expect to receive during the course of the year.
You will also have to make a good estimate of the expenses incurred to produce that income.
You will then have to calculate your income tax liability based on your net profit. You’ll also have to pay self-employment tax, which is the self-employed equivalent of the FICA tax.
It’s equal to 15.3% of your net profit. That’s in addition to federal income tax. Estimated taxes are due on four dates each year:
- April 15
- June 15
- September 15
- January 15 of the following year
Note that in 2020 these deadlines were extended due to the coronavirus pandemic.
You can make the payments either by completing form IRS 1040-ES, Estimated Tax and mailing it with a check to the United States Treasury or by making your payment online from your bank account through IRS Direct Pay.
Paying Federal Income Tax on Retirement or Bonus Income
What can you do if you receive a bonus, one large enough to impact your tax situation? Or, how do you handle the tax liability on retirement income?
You can avoid the tax liability at filing time by making additional tax payments. There are three ways that you can do this:
If the bonus comes early in the year, contact your payroll department and have your withholding tax increased.
If it occurs later in the year, make estimated tax payment directly to the IRS.
Using IRS Direct Pay you can make a payment using a credit card or directly from your bank account.
Ask your retirement plan trustee to withhold income taxes on your distributions, similar to federal withholding on your payroll.
If you make an estimated tax payment, do it as soon as you receive your bonus or retirement income. This ensures you will have the money available to pay the tax.
Paying it immediately will also eliminate the possibility of interest and penalties.
How to Pay Your Taxes Online (with a Credit Card)
You can pay your taxes online directly to the IRS, using either a credit or debit card.
There is a small fee of $2 to $2.59 if you pay by debit card and just under 2% of the amount paid if you use a credit card.
The fees may be a small price to pay if you need to make a quick payment. They will most likely be less than the penalties and interest the IRS will impose on late payments.
You can use online payments to pay your remaining tax bill, your estimated taxes, or any other tax due to the IRS.
How to Get Your Tax Refund As Soon As Possible
The best way to expedite your refund is to e-file your return. You’ll generally get your refund back within two weeks. If you paper file your return, it can take six to eight weeks.
So if you’re in a hurry, e-file. To get the refund even quicker, set up direct deposit. You can do that on page two of your tax return.
It will enable the IRS to get your refund in your bank account without the delay caused by mailing a check.
You’ll probably want to avoid instant tax refund offers. This is where tax preparers offer to provide your refund upon the completion of your return. But, it’s actually what’s known as a refund anticipation loan, not the actual receipt of your refund. You will pay interest and fees on the loan, which will reduce the size of your refund. Exactly how much depends on the tax preparer.
How to Avoid Income Tax Refund Fraud
Tax refund fraud is one of the fastest-growing forms of identity theft. A thief steals your identity then uses it to file a bogus tax return with the IRS. The return includes a very generous refund, which is paid to the thief.
The thief files the return early in the year before you have a chance to do so.
The refund is sent directly to the thief. Once the fraud occurs, you’re prevented from filing your tax return. You’re notified that it’s already been filed.
It’s a messy situation, but fortunately, it can be resolved cleanly. The IRS is aware of the problem and works with taxpayers to get it resolved.
You need to file IRS Form 14039, Identity Theft Affidavit, and attach any necessary documentation. You may be asked to supply your state issued ID card or driver’s license.
The process can take up to six months, but once it’s completed, your tax situation will be corrected. That will include the proper tax refund or liability, based on your actual return.
What to Do with Unfiled Tax Returns and Back Taxes Owed
Let’s start with unfiled tax returns. You will need to gather any documents that you need, just as you would for preparing your current return.
Any documents you do not have – possibly due to the passage of time – you may be able to obtain from the IRS. This can include W-2s and 1099s that have been provided to the IRS by employers and vendors.
You should prepare and file each return individually, assuming you need to file for more than one year.
It may turn out that you have a refund coming. But, you may also owe taxes. If you do, you should make a payment as soon as possible.
The IRS will assess penalties and interest that will be billed at a later date. If you can’t pay the tax liability due, there are two ways to handle the situation:
Make an Offer in Compromise. The IRS may agree to accept a lower amount if you qualify for a hardship.
Set up an installment agreement. You can arrange to pay your tax liability over as long as 72 months. It won’t make the debt go away, but it will give you an extended time to pay with an affordable monthly payment.
How to Avoid a Tax Audit – And What to Do if You Are Audited
Your chance of being audited is relatively small, especially if you have a relatively ordinary tax situation. But, the likelihood increases if you are high income, self-employed, have unusual income sources, or take very large deductions.
In most audits, the IRS is looking for a specific piece of information.
For example, they may request that you document a certain expense category you have taken. This usually involves supplying information by mail.
You should cooperate fully by providing all information requested in a timely fashion. The more detailed face-to-face audit occurs in one of two situations:
You’ve understated your income, and/or you’ve over-stated your expenses. You can avoid the first problem by accurately reporting all income.
In the second case, make sure that your deductions are reasonable. Outsized expenses are one of the major triggers for audits.
For example, if you claim business travel equal to 60% of your income, you’re inviting an audit. If your business consistently loses money – or earns very little – that’s another red flag.
A large deduction for business use of the home is still another factor. Be sure that you document all expenses, and that they are reasonable in comparison to the income they are producing.
If your tax returns are prepared by a CPA or an enrolled agent, either can represent you before the IRS.
If you use a tax software preparation program, you can often purchase some form of audit defense to provide assistance in an audit.
How Does Consumer Debt Affect Your Taxes?
There’s a little-known wrinkle in the tax code when it comes to consumer debt.
No, it’s not that the interest on consumer debt is tax-deductible. It generally isn’t. This has to do with unpaid consumer debt.
If you fail to pay a debt, or you settle the debt for less than the full amount owed, the IRS allocates that to the taxable income.
For example, if you fail to pay a $10,000 credit card debt, the full amount of the debt is considered taxable income.
If you pay only $4,000 of the debt, and default on the remainder, then $6,000 is considered taxable income to you.
The debtor can issue IRS Form 1099-C, Cancellation of Debt.
You will have to report the amount on your tax return, where it will be taxed as ordinary income.
If the canceled debt is $10,000, and you’re in a 12% tax bracket, you will owe $1,200 in additional income tax.
Note that this doesn’t apply to forgiveness of PPP loans originated during the coronavirus pandemic.
How To File a Tax Extension
Tax Extension Requirements
Whatever your reason is for filing late, the IRS cares about two things:
- Tell them via Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return), and
- Pay most of your tax liability for the year.
In terms of payment, this means that if you owe the greater of 10% of your final tax liability or $1,000, you will be hit with a penalty, plus interest on the amount owed. So as long as you’ve paid this amount, you will only be charged interest.
You can always find the most current interest rate by going to News Releases and Fact Sheets and looking for the news release with Interest Rates in the title. If you owe an amount small enough to carry no penalty, this is a pretty reasonable rate, certainly better than charging the fee to your credit card.
Filing a Tax Extension Gives You Time
Keep in mind, the extension also gives you the extra six months to recharacterize money you converted from a Traditional IRA to a Roth. By changing some of it back, you might reduce your tax liability just enough to avoid the penalty. This involves a bit of tinkering with your tax software, but it’s worth the effort to save those dollars.
On this note, there is a Roth trick that savvy planners have been using to maximize their clients’ wealth. Say you wish to convert $5,000 to a Roth account. Right now, choose two funds or stocks worth $5,000 and convert to two separate Roth accounts. When your tax return is due, recharacterize the account that’s lower in value. This strategy can be done with any number of accounts, so long as you remember to recharacterize. Otherwise, you’ll get a hefty unwanted tax bill.
If you simply don’t file your tax return, you can be penalized 5% of the amount owed or up to 25% maximum. Ouch.
Tax Extensions for Business Owners
For a self-employed individual, there is an added benefit to requesting an extension – retirement accounts can be funded right up until the due date of the return, including the extension. This gives you until the October 15th date to raise the money to put into the plan. For those whose business is cyclic or simply going through a down year, this extra time is a perk to be aware of.
How to File An Amended Tax Return
Reasons for Filing an Amendment
Having a Homer Simpson “Doh!” moment when filing your tax return is not the most comforting feeling. But, mistakes do happen, even to the best of us. Realizing that a mistake was made on a tax return can cause one to get nervous about audits or delayed refunds – sweaty palms, anyone?
However, it happens all the time, and the IRS even has a specific form just for filing amendments. When one files an amended tax return it voids the previously filed return and becomes the new tax return.
The reasons for filing a tax amendment can vary. Typically, the filing status was chosen incorrectly (for example, single instead of head of household), income amounts were reported wrong (perhaps a forgotten W-2 arrived in the mail after the return was filed), or deductions and credits were miscalculated.
In some cases, the number of dependents is claimed incorrectly. This can often happen in the case of divorce, where both parents attempt to claim the children as dependents, or neither claims the children (assuming the other had).
The IRS says that common calculations errors caught by the IRS computer system are not a reason to have to file an amended return.
Where to Begin the Amendment Process
Your first stop is to visit www.irs.gov or the local library for a copy of Form 1040X, Amended U.S. Individual Income Tax Return. The form will need to be completed carefully and accurately. The only information that needs to be entered is the corrected information. It is helpful to have the original tax return on hand to view and to take note of the items needing to be corrected.
Where Should an Amendment be Filed?
If an additional refund is owed, taxpayers must wait until the original refund is issued and may cash that refund check before filing an amended return. If additional tax is due, the tax must be paid by April 15th of the year that the amendment is filed. One should NOT file another original return with changes made after the first return is submitted, even if the original return looks to have not been received or processed by the IRS yet. This can cause confusion and a delay in any refunds.
Is There a Time Limit?
Typically amendments must be filed within 36 months of the date that the tax return needing corrections was filed. There are some exceptions to this rule, details of which can be found at the IRS website: www.irs.gov.
How to File
Each amended return must be filed by mail in a separate envelope with the year of the return written on the form. There is also an area on Form 1040X to explain the reasons for the amendment which must be filled out. Additionally:
- Any additional schedules, W2’s, 1099’s, or other forms affecting the amendment must be included.
- Amended returns can not be filed electronically and must be sent by regular postal mail.
- It can take eight to 12 weeks for the IRS to process an amended return.
If a taxpayer is amending a return in response to a letter from the IRS, the address of where to mail the amended return will be included. To find out where to mail an amended return in other situations, refer to the instruction booklet or the IRS website for the address for each state. As always, if you’re not comfortable doing it on your own, consult a tax professional to assist you.
How to Lower Your Tax Bill This Year
Nobody likes paying taxes. Not that they don’t pay for some things we definitely need. Roads, some kinds of healthcare, representation in the government, and lots of other things America needs to keep itself running. They are a necessary evil in a civilized society.
But still – we all hate paying them. Anybody with me? And, if possible, I think everyone would like to pay less money toward them.
I’m here to tell you that it’s possible to reduce your taxes with a couple of different tactics. Some of them may mean the money you’d spend is contributed anyway, but others allow you to keep the money in different ways.
Reduce Taxes Through Your 401k, 403b, or 457
One of the best possible ways to reduce your taxes is to contribute to a 401k or some kind of IRA (like a Roth, SIMPLE, or Education IRA). These retirement-oriented investments allow you to put money away into safekeeping to be withdrawn at a future date. If you leave the money in for the term agreed to by the individual IRA situation, you get to withdraw it completely tax-free. So, by investing your money into retirement funds before it is taxed, you completely avoid the tax on those dollars and you get to keep the money.
If you are not self-employed, employer sponsored plans are your largest resource to reduce your taxes while simultaneously saving for your retirement.
Don’t Forget the Match
Additionally, your employer may offer to match your contributions up to a certain percent. That’s an absolute no brainer. When an employer offers to match your contribution, you should almost always take advantage of that to its full extent. It’s like free money. My top recommendation to people looking to lower their taxes is to get involved with some kind of IRA or retirement planning.
Look For All Possible Deductions
Additionally, make sure that you look through the list of possible adjustments to your tax bill every year. You can deduct things like student loan interest paid, classroom related expenses, and other items. There are a number of pages in your tax documentation every year listing the possible adjustments you can take.
Deductions are the other major area to take advantage of when looking to reduce your taxes. There’s a standard deduction for most people, and there are additional deductions that some people may be able to itemize.
This includes vehicle expenses, expenses involved with running your own business, interest paid on your mortgage, fees related to investments or tax preparations, or even donations to charity. All of these items give you some wiggle room in lowering your taxes.
Give Me Some Credit
Once you’ve found all the ways to save money on taxes, it’s a good idea to look at potential tax credits. One that most people can take advantage of is the Lifetime Learner tax credit.
This tax credit allows you to write off the costs of college classes no matter what your level of education. There’s also no requirement that college classes be germane to your area of study or employment.
If you work as a computer programmer but have an interest in the history of Presidents of the United States, classes on that topic would likely qualify you for the Lifetime Learner Credit.
Another credit you might apply for is if you make energy efficient changes to your home.
If you’re not sure what deductions or credits you may apply for, find a good accountant to help you out. Many people I talk to think it’s not worth hiring an accountant to do their taxes, but what if they introduce you to a few deductions or credits that you weren’t aware of? The tax preparation fee could be offset by them. It never hurts to ask, especially if it helps reduce your taxable income.
Strategies to Lower Your Bill
For the calendar year just past (2022), your options here are limited. There are two that you can make, however, as long as you act prior to April 15:
- Make an IRA contribution, if it will be tax-deductible. You’re eligible to make this contribution right up until the tax filing deadline.
- Make a contribution to a health savings account (HSA).
For the current tax year (2023), you have a lot more options:
- Increase your tax withholding or your estimated tax payments.
- Pay any allowable deductible expenses before the current year end (expenses that could be paid in either December or January).
- Maximize contributions to retirement plans.
- Make an IRA contribution, if it is deductible under IRS income limits.
- Purchase energy efficient equipment for your home and get a tax credit.
- Sell losing investment positions just before year-end, to offset gains.
- Purchase a hybrid or electric car. You can get a tax credit of up to $7,500 (however, this credit began phasing out in 2019 so you won’t get the full credit).
- Take advantage of any available education tax credits.
How Starting a Business Can Lower Next Year’s Tax Bill
Starting a business this year can lower your tax bill when you file next spring. It’s because businesses have certain tax advantages that are not available to salaried workers.
There are several ways this is possible:
You can deduct from your income any expenses incurred to produce that income. Self-employed retirement plans are more generous than those typically available for salaried workers:
- Net Operating Loss Carryforward. Most businesses sustain a loss in the first year of operation. But, that loss can be carried forward to future tax years, reducing future tax liabilities.
- Tax-Deductible Health Insurance Premiums. If you’re self-employed, you can deduct the cost of health insurance without needing to itemize your deductions. You can also set up an HSA to pay out-of-pocket medical costs, and also get a tax deduction.
- Depreciation and Amortization. Business equipment purchased can be depreciated over several years. Organization costs can be amortized in the same way. This will give you “paper losses” for tax purposes for several years going forward.
Final Thoughts – Crypto and Taxes
This guide should cover all the basics of preparing your tax return, as well as introduce you to some of the more complex issues. Use it as a guide to get started, then get as much information as you need wherever necessary.
If you’re using a paid preparer, or a tax preparation software package, most of this will be handled for you automatically. But, it helps to know everything that applies to your tax situation so you’re fully prepared with any information or documentation that’s necessary.
YOUR INFO ON 401S NON ROTH IRAS AND TAXATION IS VERY MISLEADING
Why is that?
I HAVE ALWAYS CLAIMED 0 WITHHOLDINGS ON MY W-4, AND I GET A NICE RETURN EVERY YEAR. THIS YEAR, I AM GETTING 40% OF WHAT I NORMALLY RECEIVE. I DON’T REALLY UNDERSTAND. NO OTHER STATUS HAS CHANGED FROM THE PREVIOUS YEARS.
I am so excited to find all this tax information on my computer.. When I was younger I used to buy a tax information book for each year Now that I am much older and house bound, I decided to check out my computer. Thank you for the ” change” information and even info for next year. . I might not need it because I am 91 1/2 years now, but thank you anyhow it is nice to think about tomorrow. God Bless !
I’m retired receiving 1200.00 monthly in soc sec. I sold my house in mi for36,000.00 and moved in with my mom in Florida as a caregiver to mom 96 and brother with polio and post polio, how much tax do I pay on the house I split expenses with my mom.
There’s no way to answer that online. You’ll either have to work the numbers through a tax prep software package, like TurboTax, or crunch the numbers with a tax preparer.
No taxes due on a personal residence sale if under $250,000 gain – and being a care giver for your mom – you may be eligible for payments from Medicare – or if you pay most of the bills – get the $500 exemption credit – plus stimulus payments for both of you.
This article was very informative and it made taxes understandable. I need to know to the “why’s “ behind what I do. Thank you.
I am a little confused by this. You have stated the threshold for whether one should file or not at levels that I have not seen elsewhere. For example, the threshold has changed to file for married but filing separately to $5, not 12,000. Was this a mistake or have I misunderstood?
Hi Jane – Our sources show $12,000. If you have evidence it’s $5 please let us know and we’ll make the change. But there are a lot of little known provisions of the tax code where that may apply but it’s rare.
If my adjusted gross income after taking my $24,000 standard deduction is $21,000 – what is my income tax liability?
Hi Robert – You’ll have to look on the income tax charts to figure that out. Your age and the type of income (like Social Security) are also factors.
I have been very sick this year and out of work for a while. I did not make the tax deadline. Can I still file my taxes? Thank u for your time.
Sure you can. If you owe money, you’ll have to pay interest and penalties. But if you’re due a refund, there will be no interest or penalties. Please go ahead and file before the IRS contacts you.
File regardless – if due a refund including possible credits – no penalty. IF you owe – send a paper return requesting a waiver of penalties due to your health – they will likely honor that – but due to Covid – paper returns could take over a year to get processed.
How much can I make before I have to pay taxes??
Hi Thompson – I depends on your income level. If your single, than $12,000. If you’re married filing jointly, $24,000. But you may need or want to file based on the additional items listed.
If I live in a state with normal state income tax, but also do contractor work in a state with no state income tax, even though I know I report all income made on either one or two state tax returns(depending on reciprocity between states), I want to know or ensure that although I am reporting income, that I do not pay state tax on the money made in that state? I am essentially wondering which scenario is correct:
Person A and B both have same job, same income, and work in two states. Both live in State Tax State 1. Person A works in State Tax State 2, and Person B works in NoStateTax State. For the purpose of simplicity, lets say both state tax states have an effective rate of 10%. (Obviously NST State has 0% State income tax rate)
Person A: Total Income 70,000 STS1(Resident) Income: 40,000 STS2 Income 30,000
Person A: Total State Tax Paid is 7,000 STS1 Tax: 4,000 (10%) STS2 3,000 (10%)
Person B: Total Income 70,000 STS1 (Resident) Income: 40,000 NSTS Income 30,000
Person B: Total State Tax Paid is 4,000? STS1 Tax: 4,000 (10%) NSTS (0%) $0.00
OR is it that:
Second Scenario Person B: Total State Tax Paid is 7,000 STS1 Tax on Resident Income 4,000, and Tax on Non Resident income 3,000?
I know different states do this “tax credit thing” but I am trying to figure out what happens at the bottom line at the end of the day.
I don’t want to ignore your question Peter, but this article is about Federal income tax. We have our hands full with that one ;-)!!! State income taxes are beyond the scope of this article, and I’m certainly not a CPA. I’d recommend you discuss this question with a CPA or other professional tax preparer, not the least of which because state tax laws vary from one state to the next and have their own nuances. You could get a general answer that’s generally correct, but doesn’t apply to one of the states in question.
I live in Washington State. My husband and I are separated. We are filing separately this year. When filing this year, do I need to include half of his income and half of withholding?
Hi Lynn – Generally, not if you’re filing separately. But I think Washington is a community property state, so the rules may be a bit different. Speak with a tax preparer in your state to make sure you know what your options are.
My daughter is a college student and only made 1278.00. Federal income withheld is only 25.08. There is no totally free way to do her taxes on-line. Can you still submit in a paper copy form being mailed to IRS?
Absolutely Amy. And don’t worry if you missed the filing deadline. Since you’re filing for a refund there won’t be a penalty.
I fill out a 1040. When it mentions combined income does that mean Social Security plus my gross distribution? I am 78 yrs old. Thank you.
Hi Dorothy – Combined income usually refers to either you and your spouse’s income, or combined income from multiple sources in the same category. An example would be gross distributions from two or more retirement plans, or two Social Security sources.
Thanks so much for the input. My parents received a K1 for 2017 for a recent business dealing. The total income on line 1 was $1,659 for passive income. My parents are retired, my dad is over age 65. Their only other source of money is non taxable SS income and support from me. I normally file them as my dependents on my tax return, and would like to continue to for 2017 as well.
This year, will they need to file a tax return because of the K1 income? Or is it too low? The legal language is clear on sole proprietor income limit being $400, but not very clear on partnership income. This amount is well below the total gross income of a married filing jointly couple with one person being over age 65($22,050). And can I continue to keep them as dependents?
Hi Miah – If they don’t have any taxable income, including the K-1 income, they shouldn’t need to file. But make sure there’s a record of they’re not needing to file, just in case the IRS sends out a notice asking where the K-1 income is. As to whether or not you can continue to claim them as dependents, I can’t say without knowing all the details. Check with the IRS rules on that, particularly in regard to the investment income.
Hello my great uncle gave my mom two 50,000 checks just because back in 2017. Since I’ve filed their taxes for the year Will i need to amend their taxes and resubmit it again. Thank you.
Hi Nikki – If by “their taxes” you mean your mom, you don’t have to do anything. The recipient of a gift doesn’t have to pay tax, the donor does. Now if you also file your great uncle’s taxes, he’ll need to file IRS Form 709, otherwise he’ll to pay tax on the amount of the gifts that exceeded $14,000 for 2017.
First, you are doing Enrolled Agents a disservice here. CPAs are able to represent persons in the state(s) where they are licensed, whereas EAs may represent persons in all U.S. states and territories. You did not mention that EAs are licensed by the Treasury Department. Many CPAs do not even prepare tax returns, but rather conduct audits or perform other duties. Their licensing exams are all-encompassing in accounting areas. EAs are tested on tax preparation and representation without all the extras.
Your information is not all accurate either. For example, you state there is no immediate benefit to 529 plan contributions. However, there are state specific deductions for such credits that reduce state taxes.
Thanks for the input Joel!
I understand that in 2018 tax exempt gifts will be $15,000.00 for your children. My son is married. Can I gift 15K to my son and 15K to his wife without any tax implications for both myself and my son and his wife. Thank you.
Hi Nicolae – Yes, you can make gifts totaling $30,000 to your son and daughter-in-law by splitting it into $15,000 each.
I am a Canadian citizen and resident. My girlfriend is an American citizen and resident for tax purposes.
$14K seems to be a magic number in the US for gift purposes.
Who pays what to whom in the US on a $14000 gift I want to surprise her with?
What is the tax code reference for your reply? I can’t find anything.
Hi Bill – First off, on a gift of up to $14,000, nobody has to pay any tax. That’s the amount that you can gift without creating a tax liability. If you exceed $14,000, then the donor will have to pay the gift tax. But they can also avoid this by filing IRS form 709, which will allow them to deduct the excess gift against their lifetime estate exclusion.
Since you are a citizen and resident of Canada, the gift tax doesn’t apply to you anyway.
I am married. Been renting out husbands grandmothers house for 6 years. She passed away. House is paid off but we still pay monthly rent to estate. Her executor of estate is her ex husband which is my husband grandfather and my grandfather in law. He wants to sell house for half of market value. My spouse credit is horrible and not going to be on the application. Can he as my grandfather in law still gift me equity without my husband on loan? How how’s gift tax apply to me? Market value 130,000 wants to sell for 75,000. Appraised value maybe 100,000-115,000
He can Leana. But he, not you, will have to pay the gift tax. But if he completes IRS Form 709, and declares the gift of the house, he won’t have to pay the tax either.
If I want to gift $14,000 to my child, does it have to be all in one lump sum check or can it be distributed monthly through the year as long as the total doesn’t exceed $14k? Also, does it need to be done in the form of a physical check or can it be electronically deposited into his account? If electronic deposit monthly is ok, what documentation would need to be created to show the IRS that these deposits are an accumulation of a $14K gift?
Hi Rick – The gift can be disbursed in any increments you like, up to $14,000. You can exceed that amount but you’ll need to file the Form 709 if you do. As to the transfer method, I like using checks because it leaves you with a written document with very specific information. If you do it electronically it will be much harder to create the needed paper trail. I’d discuss it with your bank.
I think I know the answer to this question after reading all of the previous posts, but I just want to be sure. If my Uncle gives us a gift of 170,000 which we use for a down payment on a house, will he need to pay taxes on it? It will be his first ever gift, so no concern of surpassing the lifetime 5mil amount. I believe he will have to file the form, but will not have to pay anything, correct?
Hi Jessie – You’re correct. Your uncle will have to file IRS Form 709, which declares the gift, but doesn’t create a tax liability. The amount of the gift will reduce the lifetime exclusion, which is well over $5 million right now.
Thank you for your quick response!!! I appreciate it!
My question is as follows:
My parents are coming this fall (they are us residents, but live overseas) and want to give me as a gift $14 k and another 14k to my husband (we have joint account); I’m the us resident, my husband isn’t and currently waiting for adjustment of status. They will bring the money in a cash, will it be ok, if they just go to my bank and deposit them to my account (should they mark it like “gift” or prepare a special letter?) and what will be better, if they give 14 k to me and 14k to my husband, or if mom and dad give 28k to me since my husband is currently waiting for adjustment of status? Will I have to file with IRS form 3520 or 709?
Hi Maryana – It gets a bit complicated when the gift is given in cash. You’ll need to have them sign a gift letter, then go to the bank and deposit the cash. You should sit down with someone at the bank and let them know that the transfer is a gift and ask them how best to document that. There should be a gift letter for each you and your husband. Your parents should not have to file any tax forms, but the bank will file forms with the IRS due to the fact that the deposits are cash and exceed $10,000. Please talk to your bank to set up the deposit.
Thank You for your answer. One more question: if they will just make a deposit of 10k one for me and another 10k for my husband (we share the bank account),or my mom 10 k for me and my dad 10k for my husband, then they will be fine? I mean the bank won’t file forms with IRS as the deposits are cash. but won’t exceed 10,000
Hi Maryana – You should be fine setting it up that way. But the bank will most likely file documents with the IRS. They’re required to for deposits of $10,000 or more. But they can also file them for unusual deposits, which means they may do it even if it’s less than $10,000.
Caution – more than one person has ended up in hot water with the Feds by trying to get around the $10,000 cash reporting by reporting multiples of large cash sums just under the $10,000 dividing line. They could simply deposit in a bank and wire the money – or buy cashiers checks, etc.
I have 3 brothers who i want to gift $23K dollars each. Can I gift each one $11,500.00 in DECEMBER and each one 11,500.00 in JANUARY and that be 2 tax years?
Hi Curtis – That’s correct. Except that because you will below the $14k limit for each year, no taxes will be due.
My father wants to give my sister and I a gift of money, what happens if he has to go into a assisted living/nursing home in the future? How will that money be accounted for, ?
Hi John – It shouldn’t be a problem as long as he has other money to pay the facility. But if he’s relying on government assistance, like Medicaid, to pay for the facility, they have a five-year lookback. That means that any money transferred to others within five years of going on assistance can be reclaimed for payment of the cost. It’s a way for the government to prevent people from moving money, then relying on assistance to pay for them.
Does the veterans administration work the same as Medicaid, regarding the 5 year time period?
Not sure about that Patrick. Are you referring to the VA having a 5 year lookback period if you’re receiving benefits? You might want to google that question.
My mom had already given me $14,000 as a gift for 2017. She is planning to do a 2 months international tour that cost $11,000 but she doesn’t own a credit card and don’t want write a check. Can I put the purchase on my credit card and she writes me a check? Would that consider as a gift or how can I separate it from the $14,000 she already given me?
This year (2017) I’ll be selling a house in California and will be gifting half of the proceeds from the sale to my sister as a cash gift. The gift amount to my sister will probably total around $750,000. We are both U.S. citizens. I live in California but she is a U.S. citizen expat living abroad in Europe. I’m aware that next year (2018) I will need to file Form 709 when I file my taxes in order to declare this gift to my sister. I’m also aware that the amount will reduce my individual $5.45M lifetime federal estate tax exemption (of which I’ve never used a single dime). I have three quick questions:
1. Would my sister have to file any special tax form (in 2018) to declare such a large cash gift because she resides abroad? She files U.S. taxes every single year. In other words, does she need to make clear to the IRS that this huge amount was NOT income, but rather a gift? If so, what form would she use?
2. Do I need to keep a record of my 2018 tax forms and/or provide my estate lawyer with a record of this?
3. Does the IRS increase the federal estate tax exemption amount on an annual basis? Or does this happen once in a great while, like every 5 or 10 years?
Hi Emy – As to #1, your sister should have no tax liability since it’s a gift. But both you and she should keep any documents related to the gift, including transfer documents. You’ll need them in the event of an audit. #2 is the same, keep records of everything and yes, provide them to your estate lawyer. As to #3, generally speaking, the IRS increases most thresholds to keep up with inflation each year. But every few years they might make a very large increase or decrease in an amount based on new laws. Hope that helps!
If i gifted my grandma $2,000 to put down on her home and I signed a gift letter can I write that off?
Hi Christal – No, since it’s a gift.
My Mother has borrowed $80,000 from me and would like to pay me back from the sale of a house. What would be the best way for her to do this without any tax implications. Could she write me a check and fill out the 209 form and be ok as she will not hit the 5 million gift limit? Or would she or I have to pay taxes on this money?
Hi Susan – The arrangement you’re describing is a loan not a gift. If you have a formal loan agreement between you, there should be no tax implications for the repayment. However the IRS may “impute” interest income on the loan, so you may want to add that to the agreement. The interest will be taxable to you, but not the $80,000 loan repayment. Your mom may or may not have to pay tax on the gain on the sale of the property, but that’s a separate tax issue. You should both consult a CPA about this situation, just to be sure.
Hi jeff, my stepdad recently gave me 12k from his IRA account this year. the money will be used to pay off a residential property I bought and plan to rent. will I have to pay taxes and will he have to pay as well since he already or will pay taxes on it in april? thank you
Hi Luna – Your stepdad will have to pay ordinary income tax on the IRA withdrawal, but neither he nor you will have to pay a gift tax.
I wanted to give a gift to my parents before the end of 2016. On the last business day of the year I got a cashier’s check, made out to me, in the amount of $27,000. Can I sign the check over to both of my parents and provide a letter saying that each of them is receiving $13,500?
Hi Sherri – Maybe, but if it were me, I’d deposit the check, then write separate checks to your parents. The clearest paper trail will be the most defensible on audit.
My father in law’s LLC owns 75% of a multi-family property. My wife and my LLC own the remaining 25%. He and his wife wants to gift us $14k each worth of value to my wife and to me. Can the gift be made to our LLC which is Community Property in Nevada?
Hi Jeff – Essentially what you’re doing is transferring equity from one LLC to another. I’m not sure this is completely a gifting question. It may be more complicated than you think. Please read this article to see what I mean. You need to run this scenario by a CPA, since the move will shift the equity basis in the business.
My uncles recently did a business deal with a company that stands on paying him between 500k-1m.He has never filed a 709 and has given 0 of the 5m lifetime gift tax. Other than that he has very little income and virtually pays no tax.
He plans on gifting me all of the profits made on the deal. If he gifts me all of that money, does that exempt him from paying taxes on the money and does that exempt me from paying taxes on the money?
Hi Omari – As long as he files form 709 for the gift to you, neither he nor you should have to pay any taxes. In a gift situation, the receiver never pays, so you would have no liability for the gift any way.
Is a gift made out of personal Roth IRA account considered the same as a gift made by me? I am eligible for tax and penalty free distribution from my Roth IRA.
Hi Vishwas – Yes, it will be the same as a gift from any other source.
I own a home (575K) with along time fiancé/partner(joint tenancy deed). Ownership is 50/50. I recently developed illness that requires me to think fairly quickly about tax consequences for my family. Most of my assets are protected with beneficiary forms – bank accounts, life insurance, retirement accounts etc. Our intent is to leave the house to my daughter when we both die. So, in order for the title to pass with the least amount of trouble for her I would like to put my daughter on the deed with us now (as joint tenancy)using a quitclaim deed. No money or if necessary $1.00 would be the amount stated on the deed. I’m fairly certain the value of my portion of the interest in the property would be exempt but my concern is since my fiancé/partner is not my daughter’s mother would a gift tax be incurred by my daughter or fiance?
Hi Jim – I don’t believe so, as long as you file IRS from 709, deducting the value of the house against your lifetime estate of $5.4 million. The situation with your partner/fiance may be a bit more complicated, so you should consult with an attorney. I think you’ll be OK, but this is more of a legal situation than a tax one, so get professional advice. If your estate will be fairly large, and that seems to be the case, you should be talking with an attorney anyway.
I have a Roth IRA with check writing privilege. Can I write a check from the Roth IRA to another person to give that person a gift of less than $14,000 which will be considered as being made by myself? Or do I have to write the check from my Roth IRA to myself first and then write the check from my personal account to that person to consider it as a gift from me.
Hi Vishwas – You’ve got two potential tax issues here, a Roth distribution and a gift. You need to talk with a CPA about this, since it will require an overall knowledge of your personal tax situation.
My parents are married and both living. They want to give my brother and I $100,000. Do they have to split the gift or can my dad give each of us $100,000? They do not need to worry about the $5.4 million limit. The money is coming form a joint account.
Hi Susi – They can each gift you and your brother $14,000 per year without having to pay the gift tax. That would give you each $28k per year. If they want to move the entire 100k to each of you, they will need to complete IRS Form 709, so that none of the money is taxable.
My mother has home purchased ’14 for 204k now at 260k. Willing to transfer to me. She has given me and my two sons 14k gift letters each the last 3 years . She is going to give us letters for the next 3 years, and an additional letter for the following year. We plan on executing a quit claim deed. Can the deed recording be delayed until the next three years have passed? Will this strategy allow us to transfer the property with minimal taxation?
Hi Steve – An easier way would be to have her transfer the property to you now, and have her complete IRS form 709, which will allow her to avoid taxes for the gift, based on a lifetime estate maximum of $5.4 million. You won’t have to pay any taxes, and neither will she.
Hi, I recently made 2 gifts to my sister ($20k) and my mom ($32k) so they can buy their homes. I will be filing form 709. With this amount, do you know if I have to pay taxes? If I read it correctly, I’m way below the $5mil mark…so is it safe to say that I don’t need to pay taxes? 🙂 I also tried to fill out the form 709 just to have an idea, and if I fill it out correctly, I owe $0 taxes.
That should be right. The purpose of the 709 is to charge the excess gift amount against your lifetime estate of $5.4 million. You shouldn’t have to pay any taxes, nor should your mom and your sister.
My wife and I each wrote a $14,000 check from our joint account to her brother. Do we have to treat this as a split and file form 709? Or since each of us gave $14,000 separately, is form 709 not needed? Thank you!
Hi Dave – I don’t think you need to file a 709 since the checks were written separately. The fact that the money is from a joint account shouldn’t be an issue. But check with a tax preparer if you want to be certain. Draw up a couple of simple gift letters from each of you, and have your brother-in-law sign each to establish a clear paper trail.
Do we need to give the gift letters to the bank or just for our records?
Hi Michell – You might want to offer a copy to the bank for their records, but they might not even want it. Just be sure to keep the original for your records in case the IRA asks for them.
I am receiving a car as a gift from the family of someone I was a caregiver for. Do I have to claim it as income? Or pay taxes on it?
Hi Marge – If they set it up as a gift, you shouldn’t have to pay any tax on it. HOWEVER(!!!) there’s a bit of a complication here. If you’re still employed by the family, the IRS could interpret the gift as compensation, and impose a tax on the market value of the car. You should be OK if you’re no longer employed by them, but if you are…I’d have a serious chat with a CPA.
Hi, My son lives in California, (an american citizen) but I , his mother live in India.( Indian Citizen). If i would like to gift my child $200000 towards a down payment on a house, would he have to pay any tax. My Country allows me to gift any amount to my child , and there would be no gift tax in India, where i file my taxes?
Hi Rani – No, you’re not a US citizen so the gift tax won’t apply to you. And as the gift recipient, your son won’t have to pay tax on the money either. He will have to file IRS Form 3520 in order to report the gift, but there is no tax involved. I’d strongly recommend that he file that return too, that way the IRS doesn’t think that the $200,000 is some form of unreported income.
If my wife, who is a permanent resident in America, inherits money that gets reported to the IRS on form 3520 and she uses #35,000 of that to pay some credit card bills and personal loans of mine is that money considered a gift? Must I report it to the IRS on my taxes?
Hi Geoffrey – Since she is a recipient of the gift, she doesn’t have to pay tax on it. She does have to file the receipt of the gift on Form 3520, but it is an information return, and not a requirement to pay taxes.
Is their a form or letter to give to the receiver when I gift them?. I’m in an online program and we are keeping it very private. And we gift either $250.00 $500 $1000 $2k or $3k
Hi Claudia – Not that I’m aware, but you might try to see if you can find something on the web. Better idea – get a format from your accountant. Since it looks as if you’ll be gifting regularly, it’s important to get it right. For the most part though, I think you mostly need a copy of the canceled check.
My parents wants to buy me a house in Texas for $150,000 paying it outright with the house under my name. I will be renting it out since I currently live in California. Will they need to file 709 form to avoid paying taxes? Will I get a tax benefit for a first time homeowner even though I don’t live in the house and its in a different state? Since I will be renting it out, do I pay taxes on the monthly rental under Texas tax code or California?
Hi Tiffany – Your parents will have to file Form 709. They can gift you equity of $14k each ($28k total) but the balance will have to appear on Form 709 in order for them to avoid gift taxes. I’m not sure I understand what you mean by “tax benefit for a first time homeowner”, since it will be a rental property. You will need to consult with a tax expert who is familiar with income taxes in both California and Texas. You will most likely need to claim the income in CA since it’s your state of residence. As to Texas, there is no state income tax, but they may impose a tax on investment income, like rental income. Of course that’s a moot point if the property has a loss.
My parents have 100K they want to give me all at once. Do they need to fill out 709 form in order not to pay taxes and apply the 86K towards the lifetime gift tax? And let say I inherit a total of $500K when they passed, I will not have to pay taxes since they have only given me a total of $586K during their lifetime gift which is under the allowed 5 million? Also, mom and dad can give me a total of 28K annually without paying taxes. Can my dad give my brother 14K and my brother gives me $14K?
Hi Tiffany – They will have to file the 709, but only on $72,000 – that’s because they can each gift you $14,000 in any one years. You will not have to pay tax on the $500,000, since it’s below the $5 million threshold. As to the gift/re-gift scenario with your brother, I’d personally avoid it. The IRS can get ugly if they sense that there’s an intentional attempt to evade taxes. Given the amount of money involved, your parents filing the 709 should get the job done.
Lets say I won $150,000 from the lottery (after state/federal taxes the actual winning amount would be $99,375). If I were to give $50,000 of that $99,375 to one of my parents, would I have to pay the gift tax? If so, how would I go about it?
Hi Christopher – You can gift $14,000 to each parent in 2016, then $11,000 to each in 2017.
My parents just sold some property and chose to gift my wife and I $50k in the form of a personal check. The check has their living trust, and both their names on it. The check is made out to both my wife “and” I. It is only signed by my mom, but in the memo on the check, it says “4 gifts to Dave & Julie (assuming = split of $12,500 each). Is this good enough to keep everyone’s noses clean?
I had prefered that to simplify things, that they just wrote four separate checks for $12,500 each…2 from each of them to my wife and I. Now I’m a bit worried they might get taxed. Am I right to worry, or are they covered?
Hi Dave – Using 4 checks at $12,500 each would have been a cleaner paper trail. But it sounds like it’s a done deal. I’d execute a gift letter from your parents to you and your wife detailing the four way split. Maybe have it prepared by an attorney while you’re at it.
I’ve been researching gift splitting and I thought I understood the concept until I read your comments: “the husband can gift $14,000 to the child and the wife can gift $14,000 to the same child and not affect your lifetime income limit. One other important point regarding gift splitting is that for it to work, each spouse must consent to splitting of the gift. ” Each individual can gift $14,000 to any donee, which means I can gift $14,000 to my daughter and my wife can gift $14,000 to my daughter. This does not seem like gift splitting because each of us is using our individual annual exclusion of $14K on gifts. For this not to apply, the rule would have to say that a husband and wife could not gift to the same individuals/donee’s, and I do not see where that is in the law.
Hi John – That actually applies if you have to file IRS Form 709. As long as you limit the gift to 14k, you don’t need to worry about the gift splitting part of it.
My son has recently started his own business which he set up as a member based LLC. I’d like to give him $10,000 to help him get started with no expectation of repayment or equity in his business. My question is should I gift it to him personally and he can deposit it into his LLC account or can I gift it directly to the LLC or should I create a promissory note to the LLC? I want to be sure neither of us have any penalties and he receives the most benefit from this gift.
Hi Jennifer – You can gift it directly to him, and there will be no tax liability for either of you.
We want to gift our son money toward a vehicle purchase. The amount will likely be over $14,000. If I understand gift splitting correctly, my husband and I could gift up to $28,000. We also have a 529 plan that we established many years ago and are using it for his college tuition. We have not put any money in this 529 account this calendar year but will be accessing money from it for his college expenses. Does the 529- college money apply to the gift exclusion amount this year? ( so it would bring down the allowed amount of $28,000 that we could apply to the vehicle purchase)
Hi Joan – I think it does. But you can gift to both your son (for the car) and for the 529 by filing form 709 with the IRS. That will eliminate any tax liability that you might incur. Check with your tax preparer to verify this, it’s a “fine point”.
If my mother gives a gift of 28000 into a joint account I have with my husband, would it be considered a gift to the both of us? (it is meant to be) Or would it have to be into two seperate accounts?
Thanks for you time.
It should be fine Teresa. But make sure that she issued separate checks to each of you for $14,000 to avoid any misunderstanding.
We would like to temporarily loan interest free 150,000 to my daughter for down payment on a house with 30 day escrow. Their cuurent house is in a 60 day escrow so will need money for down payment on new home. They will repay as soon as escrow closes on their current house. Do we have to worry about gift taxes or other taxes?
Hi Mary – If you document it as a loan, then it won’t count toward the gift limit, or trigger the gift tax. However, just be sure that the mortgage lender doesn’t have a problem with this. They generally don’t accept borrowed funds for the down payment. You don’t want to call it a loan for the IRS, then a gift for the lender, since you’ll be being less than truthful with one of them. Not to scare you, but that can have some serious reprecussions.
My dad sold his house gave me a check for 100.000 as a gift how much taxes am I expected to pay
Hi Michele – You won’t have to pay any tax, but your father might. The gift giver pays, not the recipient. Your father can only give you $14,000 per year. Now if you’re married and he’s married, he can gift up to $56,000 in one year. He’d give you and your spouse each $14,000, and his wife/your mom would give each of you $14,000 as well.
Now if that can’t be done, he’ll have to file Form 709 to take the excess gift ($86,000) as a credit against his lifetime estate. If he files, he won’t have to pay the gift tax. Consult with a CPA if you have any questions.
Great information Jeff! I’m looking for some advice of a gift transfer. My parents want to gift $14,000 to me, my wife, and each of my three children. All the children are under 12 years old. Can each of these 5 checks for $14,000 ($60,000 total) all be deposited into the same savings account (or similar) with each child on the account or do I need to set up a separate accounts for each of my kids to ensure that this money is recognized as a non taxable gift? I would prefer to just have a single account for all this money if possible.
Hi Jason – It may be overkill, but I’d set up the separate accounts just to be on the safe side. That’s a lot of money, and the tax burden of the gift tax will fall on your parents, not on you and your family. You should go the extra mile just to protect them. Also, please make sure you make copies of any documentation related to the transfer, including the checks. More documentation is always better.
Since the wife and husband also received gifts from the grandparents, can they still be joint owners to each of the new 3 separate kids’ accounts?
Hi Cath – That’s an excellent question for a CPA. I don’t think there will be a problem as long as the kids’ names are on the accounts. After all, as minors they can’t hold the accounts solely. The bank might also be able to answer that question for you, but I wouldn’t bet on it.
My husband is self employed. If my sister writes a check to me for $14,000 and a check to him for $14,,000 and we deposit it in our joint account will we have to pay income tax on this gift of $28,000 total? Also, she still has a balance owed to us in the amount of $2,500. How can she gift that to us without filing a 709 form? Do we have to wait until 2017 for the balance. Also, do we need documentation that the $28,000 was a gift from her? Thanks so much for any advice.
Hi Jo – First, it wouldn’t be you having to pay the gift tax, but your sister. The gift giver pays the gift tax, not the recipient. As long as the gifts from her to you and your husband don’t exceed $28,000, there is no gift tax owed, and no Form 709 to be filed. If she wants to gift a higher amount, there are two choices: wait until 2017, or have her spouse gift the additional money under the same limits – if of course she’s married.
As to documentation, yes you should have a paper trail documented that shows it’s a gift, who give it, and how it was transferred. If you can’t document a gift or other monetary source, the IRS can say that it’s undeclared income, and make you pay both tax and penalty on it.
Nice website. I have similar questions to those that have already posted. I have lent my mother $60k over the past year to improve her home. She is selling the home and plans to repay after closing. We have promissory notes and receipts that I loaned her money (I paid for cabinets, flooring with credit cards to take advantage of points/airline miles so there wasn’t a true transfer transaction). Will the notes be satisfactory to the IRS for her repayment? She plans to repay in whole at once. Or can she just file a Form 709 as a gift since it’s over 14k annual limit? Please confirm that there will be no tax implications of she gifts the money back all at once as long as she files a Form 709.
Hi Jason – I think you’ll be OK with the promissory notes and the receipts. As long as everything matches up, it’ll be a decent paper trail. You may want to do a consolidation note that provides the full amount of the loan (since the money will be repaid in a lump sum), but itemize the individual loans made along the way. That will eliminate confusion, particularly on audit. Also, keep all of the notes and receipts and other paper work in a dedicated file, that way if you’re ever audited you’ll be all ready. Oh, and no, she shouldn’t have to file form 709. It’s a loan, not a gift, so there are no tax consequences.
Hi Jeff, My father wants to give me 28k towards a home I’m buying. He plans to wire transfer the full amount directly into the escrow account set up by the title company . The house will be community property in my name and my wife’s name. Is it okay to make the wire transfer in the full amount of 28k into the escrow account and say that it represents 14k for me and 14k for my wife? Would that fly with the IRS, or would my father need to make it clearer that the gift is split by, for example, writing two checks for 14k in each of our names? or for example, wire 14k into the escrow account and later write a 14k check to my wife?
Hi Dave – You’ll get different answers from different people, but just to cover yourself on all fronts, I’d take the more detailed route. Have your father send separate checks for $14k each to you and your wife, notating gift on the check. Make copies of the checks before you deposit them, and also copy the deposit ticket and the bank statement, and set it in your permanent tax file. That will give you a very specific paper trail in case of an audit. A wire won’t provide the same protection.
On a good note however, that’s about the documentation that the mortgage lender will require too, so you’ll be killing two birds with one stone.
If gifting $100,000 to a relative and the gift is returned in a short period of time (say 30 to 60 days), is there a tax consequence? (The gifting is necessary because real estate is involved and the debt to loan ratio would be exceeded if the 100K were a loan.)
Hi MA – You have a bit of a conflict here. To the mortgage lender, you’re going to call the transfer a gift. But to the IRS, you’re going to call it a loan. Tread very lightly here because you’re dealing with US government agencies on both sides of the transaction. You’ll be taking a chance no matter which way you go. Unfortunately, that’s the best (and the most) advice I can give.
Hello, my best friend just got her trust and is going to gift me a million dollars will the IRS audit me when I deposit it into my account and will they take taxes out as well?
Hi Rita – The tax liability will be on your friend, not on you. Your friend will have to pay a gift tax on the amount transferred, or file IRS Form 709 to deduct it against his/her estate. You may hear from the IRS, since your wealth will have increased dramatically with no taxable income to explain it. But the gift will be the source so you won’t owe taxes. Just make sure you have a clear paper trail as evidence that it’s a gift and not undeclared income.
If My wife and I owned a home for 2 yrs lived it in for a year rented the other and sold the home with a gain of $77,000. What would be my capital gain tax be?
Hi Leilyn – I’m going to take a stab at this, but first be advised that you need to work with a CPA on this. Sales of converted investment properties are complicated. That said, you need to know the adjusted cost basis of the property both when you first bought it, and the fair market value when it was converted to a rental property.
you need to know three things: 1) Your adjusted basis in the property (both at the time of conversion and at the time of the sale); 2) The sale price; 3) The fair market value of the property when it was converted to rental property. If the house is sold at a gain, your tax basis is your adjusted tax basis on the property at the time of the sale. If the property is sold at a loss, the basis is the lower of the property’s adjusted tax basis at the time of the conversion or the fair market value of property when it was converted from personal to investment. Like I said, it’s complicated, and you need to work this out with a CPA, who can give you real numbers.
My mother has about $30,000 in stock.
She wants to gift it to her children, it is 2 of us.
From my understanding, if she gifts, $14,000 to each of us, and $ 2,000 to one of our spouse, nothing will get reported to the IRS on her behalf?
Do we have to keep the money in the stock for sometime, or can I readily sell / cash it out without further tax consequence on her. I expect to pay the capital gain tax.
Hi BB – How you have spelled it out is correct. As long as your mom doesn’t gift more than $14,000 to each of you (including spouses) there is no gift tax due, and the gift will not need to be reported. You can keep or sell the stock, and if you sell it there will be no tax consequence for her. You can expect to pay the capital gains tax on the difference between the amount you receive for the sale, less your mom’s cost basis in the stock (what she paid to buy it, plus related costs).
My dad just sold a piece of property, He signed over a check he was given to my sister in the amount of $67,000. How will that affect her “tax wise” from that amount she will have to write 2 checks for me and my brother in the amount of $7,000. Thank you
Hi Raul – It won’t affect her taxes at all. As the recipient of the gift money, she has no tax liability. But your dad should complete IRS Form 709 so that he doesn’t have to pay a gift tax on the transfer. On Form 709 he can apply the full amount of the gift to your sister against his lifelong estate tax credit of more than $5 million. Your sister will not have to file the 709 and will not owe any gift tax since the gifts to you and your brother are both well below the $14,000 threshold that triggers the gift tax.
So my grandfather is helping me put %20 down on my conventional mortgage. He has already sent 14k to the lender directly and 45k is owed. He just transferred me 28k, from him and his spouse, in stocks so I could cash them in and pay to my mortgage company. Our dilemma is that he was going to send me a check to deposit for the remaining 17k. My mortgage company is saying they need gift letters for this which would make him go over the 28k from him and his spouse. Is there any way around him having to pay taxes and I can pay the taxes? Also, do you know about the lump some of gifting 70k for 5 years? Thanks!
Hi Heather – Asking for a gift letter – as well as documentation of both the source and the transfer of gift funds – is standard operating procedure for mortgage lenders. They’re unlikely to bend on that issue. Your grandfather can give you the entire gift at once, and he can avoid paying gift taxes by completing IRS Form 709. That form will allow him to apply the amount of the gift against his lifetime estate credit of $5.3 million+. As recipient of the gift, you will owe no taxes.
You may need to consult with a CPA about the lump sum gift issue.
I’m currently in the process of purchasing a home and my parents will be gifting me $100k for the downpayment.
1) as long my parents file Form 709 they will not need to pay taxes, correct?
2) I will be recieving a large bonus at the end of the year and would like to return the gift to my parents. If I follow the same gifting process will I have any issues?
Hi Brendon – You’re correct on both counts. But it might be simpler to just set it up as a loan from your parents, which you will repay within a few months. You can set up a loan note, which will be evidenced by the repayment.
I live in IL and want to buy my daughter a home for $132.000. Do I have to pay a gift tax on that. Also, if I put the house in my name would that void out a gift tax!
Hi Penny – If you buy the home for $132,000, you will have to file IRS Form 709, which will apply the gift against your lifetime estate exemption of over $5.3 million. No gift tax will be due. But if you buy the home with your daughter, the gift won’t apply since you’ll be co-owners.
Sorry to piggy back off of this post, but I want to gift a car worth 18000 to a friend. I live in SC. The car is paid off. Will my friend have to pay sales tax? Will I get in trouble with the IRS since its more than my annual limit?
Hi Brittney – In most states, sales tax is due any time you transfer ownership of a car. The real question is what value they will base the sales tax on. In neighboring Georgia the division of revenue can assign a value to the car for tax purposes, but I don’t know if they do that in SC too. In regard to the IRS, since it’s a car, you won’t be able split the gift between two tax years, the way you could with a cash gift. That means that you will need to file IRS Form 709 which will allow you to apply the full 18,000 against your lifetime estate allowance ($5.3 million+), and not have to pay any gift tax.
Can I transfer $28000 from a joint bank account of myself and my wife as a gift to our daughter’s account?
Can we show this gift in our tax filing which is married filing jointly?
Hi Roy – You can each gift up to $14,000 per year – $28,000 total from the two of you – to your daughter, but it does not get reported on your tax return. Are you asking if you can deduct it from your income? If so, the answer is “no”. But you will avoid having to pay a gift tax on the $28,000. I hope that answers your question.
My mother wants to gift my family $35,000 for a down payment on our first time home purchase. I want to run this scenario by you in order to have my mother avoid filling out the Form 709. Can she do the following:
1. Write a check for $12K to myself
2. Write a check for $12K to my wife
3. Write a check for $11K to my minor daughter that we can then sign over to our joint savings account (by signing my name and then underneath writing PARENT OF MINOR)?
Does the lender care that the $11K check was written to our daughter instead of to us if it still ends up in our savings account? We would then wire the $35K to the lender at closing.
What are your thoughts? And thanks for your help!
Hi FTB – You’re thinking in the right direction, at least from a tax perspective. But as you point out, the mortgage lender may have an issue with the check being paid to your child. Check with them, and see how they’ll handle it.
Dad died 1/13. Mom gifted me her house 4/13. I read about capital gains taxes. I talked with the tax man and the attorney. I gifted the house back to Mom 12/13. Do you foresee any problems with this? I live in Virginia. Thank you so much.
Hi Aaron – Please don’t take offense at me saying this, but your situation reads like a theory question! Go with what ever your accountant and attorney say, they’re the experts. What I do know is that when your mom gifted the property to you, she transferred her basis in the property. I THINK that when you gifted it back to her, the basis remained the same, so there is no tax consequence. But this is why I highlight the theory aspect of your question – the back and forth in ownership creates complications and you need to work those out with professionals.
I just want to be sure I have the correct understanding. The amounts I gift do not reduce my taxable income.
They are under the $14,000 per person.
Hi Sherry – You’re correct, the amounts that you gift do not reduce your taxable income. And since they are under $14,000 per person, you won’t need to file any paperwork with the IRS, such as IRS Form 709. On the flip side, the recipients of your gifts are not required to include the gifts in their taxable income.
But if you do give a gift to any individual of more than $14,000, you’ll have to look into filing Form 709 in order to avoid you having to pay a gift tax on the excess over $14,000.
If My husband and I was given a gift of equity from my dad and his spouse when I purchased my home two years ago in the amount of $48,600 and I am now selling my home will this affect me at tax time?
Hi Derrilyn – It shouldn’t. The gift was part of the acquisition cost, and your basis for the sale is determined by the agreed upon acquisition cost. Since it’s your primary residence, there will be no tax consequences if either a) you purchase another primary residence at equal or higher value, or b) the profit on the sale is less than $500,000 (since you’re married).
My elderly parents gave me $10,000 every other month or so in 2015 ($70,000 total) to “reward” me for being their full-time caregiver. I am not employed otherwise so this was my only “income”.
I am not sure if I should consider all this a gift and file Form 709 for the amount over $28K with my parents taxes — or if I should consider all this as income (since I was technically providing a service) and file a return for myself reporting the $70,000 as income and paying the taxes on it.
Or maybe a combination of the two? The $70,000 annual salary is way above the fair market rate for full-time caregiving in my area. Half that amount would be pretty fair.
Unfortunately this was an informal agreement so no documentation exists — no employment agreement or gift letter, and I am not set up as a “caregiving business”.
Thank you for any insight you may have!
Hi Tom – You’re in a gray zone here, so my advice is to discuss this with either a CPA or a tax attorney. They may recommend a split, where half is a gift and the other half is salary. If 100% is a gift, then no one will have to pay taxes if you file IRS Form 709. But any part that you consider to be salary will not only require payment of regular federal and state income taxes, but also of FICA taxes (since it’s earned income). The tax bite to you could be huge.
Since you are caring for your parents, it’s conceivable that you did it for free, as many children do for their parents, and the total amount is a gift. But you should get a professional involved so that you’re thoroughly covered. It’s a good bit of money, and the tax bite could be big.
Can I give daughter $14,000.00 December 2016 and another $14,000.00 January 2017 without paying tax?
You can Linda. That’s actually the perfect way to set up a gift too. You won’t exceed the threshold in either year.
To expand on this, what happens if a gift was given on Dec 27, check was deposited but not cleared by one (or both) banks until the following year? Or is the gift of money considered “given” in the year the check was written and handed over to the recipient. I want to avoid any the donor to pay taxes if the gift at the end of one year “overlaps” the gift given the next year.
Hi Connie – As the donor, the date is determined by the check date. The recipient could wait until the middle of the following year, it doesn’t matter.
I bought a house during the housing crisis for a low price. It was for my daughter and son in law because they couldn’t qualify for a mortgage at the time. The only reason the house was in my name was because they couldn’t qualify at the time. It has always been their house.They lived in it and made all payments associated with the house, house payments, property taxes, insurance, etc. until they were able to qualify for a mortgage. When they were able to qualify, I sold it to them for the same amount that I paid for it, but housing prices have recovered, and it appraised for more, about $80,000 more.. I didn’t take income tax deductions for interest, etc. during the time the house was in my name, nor did they. I own my own house.
Do I still have to file a gift tax return for the difference between what the fair market value was at the time of purchase and the fmv when they bought it, in 2015, less the $28,000 ($14,000 exemption each to my daughter and son in law) or does the IRS consider intent?
Hi Judy – This is a CPA-level question so I suggest you consult with one before doing anything. They’ll need to do some research. I believe that the amount of the gift will be limited to the price that you agreed to transfer it to your daughter and son-in-law for. However, since it isn’t an “arms length” transaction, it’s entirely possible that the market value of the house at the time of transfer will be the assigned value of the gift.
Most likely you will have to declare the property on IRS Form 709, which means it will be applied as a reduction in your estate exemption, which is over $5.3 million.
My Mother gave lifetime gifts of $14,000 to each of her children, and an additional $14,000 to the spouses of the children who were married. How are these gifts ‘normally’ treated in terms of advances on inheritance? Since usually only children (not their spouses) inherit from an estate, do the gifts to married children count as double the advance? Or, are gifts to children’s spouses considered as separate from any advances to the children?
Hi Tom – The gifts don’t have to be to family members. As long as they don’t exceed $14,000 it won’t have any effect on your mom’s estate, whether the money was given to her children or to their spouses – or even to her grandchildren for that matter.
My husband passed away last month in February and I am beneficiary of life insurance. He wanted me to give our children some money. Can I give 56k to my daughter and son in law this year from my husband and I, or just 28k from me?
Hi Martha – First, I’m very sorry for the loss of your husband. As to the gift, you can gift $28k from yourself with no problem. If you want to go with 56k since your husband was alive part of the year, I’d discuss it with a CPA or tax attorney first. Since the money will clearly come after his death (evidenced by the fact that it comes from his life insurance), you could have an issue with the IRS on audit.
At worst, the accountant or the attorney would have you file Form 709 for the amount of the gift over $28k.
Ohio residents, my mom, from her name only checking account, gave $140,000 to me (daughter). My Dad wants to file the gift tax return and report that HE gave the $140,000 to me. Why? I don’t know. But can they do this? Check was written to me in 2015. I’m trying to help them do the gift tax return. I told them the gift was from mom’s sole account, and should go on her gift tax return. But they insist they want it in my Dad’s name.
Hi Kerrie – I’m not seeing anything in the IRS regulations that specifically addresses your situation. There is an explanation for “split gifts”, but not for a gift from one spouse and declared by another. My own thought is that you need to have the form completed by a CPA. Should the IRS come back later and decide that the gift was improperly reported, they could impose the gift tax plus penalties and interest. It’s worth paying a few hundred dollars now to avoid that situation later. There may be some specific reason they’re wanting to handle it this way that needs a close look by a trained expert. The amount of the gift is large enough that it could draw IRS attention and open up a series of questions.
a friend of mine wants to give me 20k as a gift. How can she do it without getting taxed on it?
Hi Jeff – She can gift you up to $14,000 without having to pay a gift tax on the money. If she wants to give you $20,000, she can either a) give you $14,000 now, then wait until 2017 to gift you the remaining balance, or she can b) have her tax preparer complete IRS Form 709 to cover the $6,000 balance so no tax will be due on it either. Form 709 charges the excess against her estate, and since there is a $5.34 million limit there, the $6,000 excess won’t even make a dent in it.
I live in Atlanta(Georgia) now. My parents (non-us citizen) are in India and they are willing to gift me a total of $37,000 for my house’s down payment. Will this be taxable ? And will mortgage company accept this as a valid gift?
Since they are not US residents/citizens there will be no tax consequences. The mortgage company will be a bit of a problem. They will accept it as long as you provide a fully executed gift letter from your parents (must state that the funds are a gift and don’t need to be repaid), a copy of the source bank account showing that they have the funds to cover the gift, and evidence of the transfer to your account.
If they have to cobble the money together from different sources, or if the source is unclear, the mortgage company will most likely not approve the gift. They’re tough when it comes to gift money as a down payment source.
My father-in-law wants to gift us $50,000.00 for down payment for a house. My husband and i have a joint bank account. My son is a minor and has a bank account as well but my name is there in his account too.
1) Can my Father-in-Law gift $28,000.00 to our joint bank account ($14,000 to my husband & $14,000 to me)?
2) Since my name is on my son’s account as well, can my Father-in-Law gift him $14,000?
3) If my Father-in-Law gifts my son $14,000, can i transfer that amount to my husband & my joint account?
Hi Sammy – In theory yes, but you’re going to have to check with your bank to determine how the checks need to be written by your father in law. Banks sometimes require that checks on a joint account be written to both parties simultaneously. If so, have your father in law write the checks of $14k each individually, and deposit them in individual checking accounts – then move the money to the joint account. The paper trail has to be clearly separated.
As far as the gift to your son, then back to you, again check with your bank as to the exact procedure. There may be limitations if it is a custodial account. If that’s the case you may have to have your father in law send the amount over $28k as a single check, then file form IRS 709 to avoid taxes on it. His tax preparer will know what the form is, and how to file it.
A relative of mine has two adult daughters that are not dependents. He offered $15,000 to Daughter A to purchase a car. To get the gift to Daughter A, he first wrote a check to Daughter B for $15,000. Within a week, Daughter B then wrote a check to Daughter A for $15,000, fulfilling the gift from the father to Daughter A.
1) Who would the father list as the gift recipient on his gift tax form 709?
2) Would Daughter B need to fill out gift tax form 709 if her only role was to help facilitate moving the gift from the father to Daughter A?
Hi Jon – If you don’t mind me saying, this sounds like a test question, and a theory question at that. But I’ll take a stab at it. Dad’s gift is to Daughter B – period. He must file Form 709 for $1,000 – the excess of the gift over the $14,000 gift allowance, paid to Daughter B.
Daughter B would have to do the same, since she’s constructively the donor for Daughter A.
I understand the concept of wealth distribution here in that I can transfer large sums of money to someone else without either one paying extra. So it becomes extra $14000 someone can spend without paying tax. My question is does this tax rule also mean my own tax liability got smaller I.e. if I make $250k and gift 7 people$14 k does my reported income get to drop by $98k?-thanks in advance.
No Geovany, there’s no reduction in your income as a result of distributing $98k in gifts. The general rule is that a deduction for one must be income to another, and since the gift recipient doesn’t pay tax on the gift, the donor can’t take a deduction. Sorry!
I’m a resident alien (H1B work visa) and made a bank transfer of $50,000 from my account to my parent’s bank account in the US ( mother and father in the same account) My parents are not US citizen’s or Permanent resident’s, they live and reside overseas.
Is this consider a gift?
Even though I’m not a US Citizen or Permanent Resident, do I need to pay gift taxes?
Since both of my parents are part of the “donee” account, can I gift them $28,000 without reaching the yearly limit?
What is the purpose of filling the form 709?
My bank must notify me that form 709 is required? given the fact that I transferred an amount of $14,000?
How does IRS track the bank transfers?
That’s a lot of questions Alfonso, I’ll try to answer them one at a time. As a US taxpayer, you’re subject to gift tax regulations (check with a CPA to see if this isn’t the case). In addition, the money is transferring through a US based bank. The IRS tracks such transfers because the banks are required to report movements of money of $10,000 or more (and even less under certain circumstances).
You can give them $28k ($14k each) without incurring gift tax. But any amount over this will have to be reported on IRS Form 709, otherwise you will have to pay a gift tax on the excess. Form 709 applies the excess to your lifetime estate exemption of $5.43 million, so it’s well worth filing the form. Oh, and no, the bank will not notify you that you need to file Form 709. That’s between you and your tax preparer. And you will have to let him or her know about the transaction.
Does that answer all of your questions?
Thanks Jeff!! you are the best!
Hi. If I am gifted $85,000 in equity when purchasing a house, do I pay taxes on that as the person receiving the gift?
Hi Shan – You won’t have to pay any tax on the equity gift, but the donor might have to. A gift of equity is subject to the same gifting rules as a cash gift. The donor has an annual limit of $14,000, above which gift taxes will have to be paid by the donor. Since the amount of the equity is $85,000, there could be a gift tax liability on up to $71,000.
The donor could avoid this by completing and filing IRS Form 709, which will apply the $71,000 excess gift as a reduction of the donors lifelong $5.43 million estate exclusion. That would get you the full $85k equity gift and avoid the donor having to pay gift tax.
can my mother give a gift to her son and can the trustee hold on to the gift until the mother passes away………………does the gift have to be distributed or can it be held………….
Hi Sally – She should be able to. All she needs to do is to make the gift to the trust. She can then leave instructions to the trustee to distribute the funds to her son after her death. She should document the gift the same way she would if she were making it directly to a person (keep a copy of the check and any paper work that establishes the gift).
Hi Jeff !!
I have a dear family friend that is retired and makes multiple donations a year . He basically gives every dimes he gets from his monthly retirement to friends and family. He says it’s not his money it’s Gods. None of these places are charity organizations, they are just everyday people that he chooses to help because they have fallen on HARD times and chooses to help them. He lives very minimally, just so he can do this to help everyone. My question is … Is there away he can claim these donations ?
Hi Dawn – Not that I’m aware. You can only claim charitable deductions for gifts made to organizations that are registered with the IRS as 501(c)(3) Non-profit Organizations. But he may be able to work that out. If he gives the money to a registered charitable organization who then gives it to the people he specifies, he will be able to give them money, and get a tax deduction from the charitable organization. I’ve heard of that being done, but I’m not sure how many charities will actually do it. There may be complications I’m not aware of. Have him discuss the idea with some of his favorite charities and see what they can work out. There may be another way they can suggest.
Given his faith based purpose in giving, the charitable deduction may not be a deal breaker for him. Some things are more important than money, and laying up treasure in Heaven (Matthew 6:19-21) is one of them.
In the above question we meant “avoiding of any tax” on the gift by the payer or receiver of gift.
Hi Brilliant – You can handle the filing of the 709 any way that you want. My recommendation to have it prepared by a CPA or tax attorney is based on the fact that you/your friend probably haven’t filed one before and may not understand the nuances. Also, in the event that the IRS has any questions or issues with the form, the CPA or attorney could represent you. On a $500,000 gift, a mistake could be a very costly one. I’d rather spend a few hundreds to have the form prepared by a professional and avoid bigger problems later. An attorney friend once told me that his standard advice is “never get into a deal that will save or make you $1,000, if getting out of it will cost you $100,000.” I thought it was great advice.
A friend of mine wants to give me a monetary gift of half a million dollars. I understand based on your above response that he can avoid it by filing form 709 & claiming it against his life exemption of $5.43 million. Do we still need to contact a CPA or can we proceed at our own in this arrangement.
There are thousands of articles that rehash the same information about gifting. And there doesn’t seem to be a bullet list of gifting facts. I search “does gifting reduce agi?” and I get ambiguous answers and articles like this which don’t give a clear answer. DOES GIFTING REDUCE ADJUSTED GROSS INCOME? Yes or No? I wish your article would state this. I wish you would explain exactly where and how gifting reduces taxes. I also wish you would be clear and spell out that someone may give $14,000 multiple times.
SO combining these two thoughts, can a single parent of 10 adult kids gift $14,000 to each kid? And will those ten $14,000 gifts reduce Gross income by $140,000? Please explain EXACTLY where and how this is recorded and reported on a tax form.
Remember you are not writing to people who know how to use gifting. You are writing for people who don’t know how as well as people who are trying to learn how to use gifting. So far, I have found no articles that are much different than this one. All seem to use the same source and are dressed up slightly different with wide-ranging catchy headlines.
@j.axelson. Have you actually consulted a tax professional? Sounds like in your situation it would be worth the money and time spent if you’re not getting the answer you’re seeking by searching on the web.
I think this person is asking whether they can deduct a gift to their children from their income taxes. The answer is no. Gifts to individuals are not deductible.
The purpose of the gift tax reporting requirements are to prevent very wealthy people from escaping inheritance taxes by giving large sums of money away to other individuals in order to reduce their estates.
I hold a mortgage for a friend and wish to deduct $10,000.00 from the principal each year. Is this considered a gift and does the recipient have to know about it?
Hi Philip – That’s a very technical question, and one that you need to discuss with a CPA. Here’s why: You could be considered as gifting a portion of the loan principal each year, but that could also constitute forgiveness of debt income for your friend, on which he’d have to pay taxes. The other issue is that you’re gifting it to a non-family member.
I’m not saying there isn’t a way to do what you’re saying, only that there are complications. As a general rule, you could run into issues with the IRS if your actions look like a tax dodge of any sort. I’m not saying that’s how it will play out, only that you need to discuss such a strategy with a tax professional before proceeding. Some solid research is needed, and should be included in your tax file for each year that you use this strategy – if your CPA thinks it’s OK to do.
Taxes are never as simple as we want to think, and there are many, many, MANY times when getting advice on a blog won’t fit the bill. So my recommendation is that you discuss this with a CPA, and raise the issues that I have here.
Could my mother gift $14,000 to my family (me, my husband, 3 daughters) = $70,000 without getting taxed? Also, could she make out individual checks for December 2015 (but not cash them yet) and again in 2016? What if she made out checks in 2015 but we still have not cashed them yet?
Hi Melissa – Yes, your mom could gift $70,000 to your family of five without incurring gift tax, as long as she does individual apportionments of $14,000 for each person. We’re well past December 2015, so I don’t know if retroactively dating the checks is a good idea. The IRS could counter that the five large checks would be unlikely to be held for a full month (or more) without being cashed. A better idea might be to have her write out checks for 2016 now, then do another batch for January 1, 2017, so that you don’t get double gifts in the same calendar year.
If she wants to gift more than $70,000 she can always have her tax preparer complete IRS Form 709, and declare the amount of the excess gift amounts. That will reduce her tax-free estate (currently about $5.3 million in 2015) by the amount of the gifts, but she wouldn’t have to pay a gift tax.
Thanks for the response! Just one more question. If my mom was to withdraw $100k from her 401k to give me for a down payment on a house…how much would be deducted for taxes? I would need the taxes to come out right off the top. Just trying to see which route would be best.
If I want to gift my condo to my brother as a wedding gift ($400k) – does he need to pay tax and what are some of the things i need to think abt.
For a gift of that size, you’ll almost certainly have to do a transfer and report it on a gift tax return (IRS Form 709). You can take it as a reduction in your overall estate. Since the amount of an estate transfer must be well in excess of $5 million to be taxable, the $400k transfer won’t hurt it that much. You may want to look more closely at your state gift tax though, as some have lower taxable thresholds. Before you make the gift, be sure to consult a tax accountant or tax attorney!
I own a farm with 4 siblings through a Living Trust in Illinois. There are some siblings that have taken personal loans from the Trust and now it is time to settle on the loans. The loans are around $100,000 each for three siblings. Can each sibling (with a loan) gift the other 4 siblings up to $72,000/year ($14,000ea x 4) of farm equity based of the current land value? Can the maximum limit be $142,000 if the sibling with the loan has a spouse to also give the same gift?
Hi Richard – Your question is very specific, and involves a living trust. That is to say that your question isn’t related exclusively to gift taxes. Is there an attorney involved in the trust? If so, this kind of question should be directed to him or her. There may be complications beyond taxes (and even involving taxes) in this kind of arrangement. Your documentation and strategy will need to be very specific.
Can someone gift me a car who isn’t a family or spouse and get their money back on taxes and how? I live in an area where there is no city transportation and have to walk to work and school and someone wants to gift me a car.
Hi Patricia – I can’t claim expert status here, but you may do better handling this kind of transfer using an agency that specializes in gifting of cars. I can’t recommend anyone specifically, but you should be able to find a charity on the web.
Since the donor isn’t a family member, they can gift the car to the charity, who can then gift it to you. That will make it an arms length transaction, and provide a paper trail for both you and the donor. The donor should get a tax deduction for the market value of the vehicle.
I have both sets of grandparents wanting to gift money to myself and my 2 kids. Can each set of grandparents gift 14,000 to the 3 of us?
Actually Tracy, each grandparent can individually grant up to $14,000 each ($42,000 total) to you and each of your two children. And since there are four grandparents, they can each make a similar gift.
Put another way, your four grandparents can gift up to $168,000 in total to you and your two children. This will result in you and each of the kids receiving $56,000. No tax consequences will be incurred in the transactions.
Am I able to give my wife money from my 401k distribution to help avoid more taxes at the end of the year?
Hi Charles – Doubtful. From an IRS perspective, you and your wife are seen as a single financial entity, so the amount of the distribution will be taxable no matter how you cut the deck. The distribution is from your plan, so the payment (and tax liability) will be assigned to you. What you do with the distribution won’t change the tax liability.
My advice would be to find some tax deductible way to use the distribution. For example, if you still have earned income, you may be able to make a contribution to an IRA. That will enable you to shelter at least part of it, though not directly. If you do consider this, discuss it with your tax preparer first. Also, if you’re over age 70 1/2, you won’t be able to contribute to an IRA anyway. It can be complicated.
a few years ago when he lost his job, my husband went back to school. I paid for his tuition (directly to the university) using my credit card (I have never paid interest though) and I added him to my health insurance plan too. Do any of these expenses qualify for the marital deduction? If so, what form do we need to use and what would be the most advantageous filing status? Thank you.
Hi Ramona – Since you provided support for your husband, gift rules don’t apply. Gift rules between spouses don’t apply, since you are generally viewed as a single financial entity for tax purposes.
My wife’s grandmother is gifting to her father 14k who gifts to me 14k who I gift to her fathers brother 14k. An additional 14k is given to my mother who gifts 10k to my wife to keep and 4K to my sister in law to keep. Hope ur with me so far. my 14k was deposited in December ’15 but the check I wrote to my father in laws brother won’t be deposited until 2016. My mothers gift check was deposited in December 2015, the 10k she gave us was deposited in December 2015, but the 4 I from my mom to my sister in law won’t be deposited until 2016. Will any of us have any issues with gifting 14k in 2016 tax year?
I forgot to mention the additional 14k gifted to my mother came from my wife’s grandmother.
Hi Scotty – That sounds like a brain teaser, so I’m going to refer you to your CPA. I’d advise presenting the question in the next few days, as this is an incredibly busy time of year for accountants, and he or she may not have time to address it.
My mother was thinking of gifting my fiancé and I a “family startup fund” if you will of around $100,000 to buy a house, pay off student loans and things like that. I’ve come to understand that she can only gift me $14,000 a year to avoid the tax, but can she also gift my fiancé $14,000 as well since we’re not married yet? Also, is there any steps you can take to receive the whole amount at once without being taxed or is this not possible? Thanks.
Hi Jeff – According to this article in the Wall Street Journal, yes, your mom can make a gift to your fiance, or even to a total stranger if she wants.
She can actually make a gift of more than $14,000. But if she exceeds this amount to either you or your fiance, she may have to pay a gift tax on the amount that exceeds $14k each. There is a work-around for this however, but she will have to engage the services of a CPA to do it. She will have to complete and file IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
By filing this form and reporting the full amount of the gift ($100k) she can exempt this amount from gift tax inclusion. Actually though, she’s really deferring it. Form 709 lets you avoid gift taxes by using the amount of the excess gift to reduce your estate when you die. For most people this is a safe move because estate taxes aren’t triggered unless your estate exceeds more than $5 million. In the end, no tax is ever paid.
Does the gifting of money need to be done with a check of some kind or can it be done as cash with proper paper forms? I’d like the recipient to be unaware of what is taking place until they receive the gift. Can this be gifted into a trust of some sort to be used or accessed at a later date without the recipient knowing what is taking place?
I’m confused also about gifting to a spouse. Is it possible to do that? If so does it have to be done with a non joint account and/or can it be done with cash?
I would like ideas on protecting money assets from future long term care costs. I thought gifting might be one of those ways but not sure if it is a good way because of the possible need for that money in the future for personal expenses that would be my responsibility. I don’t want the gifted to feel like it was given to them but now is needed back in the time of need.
I’m under the gun because of the amount of days before years end as I would like the gifting option for the new year to be available for me to use again in the new year.
Hi Al – You’ve asked several questions, so I’ll try to take them one at a time. In regard to the secret gift, you can set this up different ways, but understand that a clear paper trail – including checks – is your best defense in the event of an audit. It seems you should be able to do it in secret, such as by a wire transfer directly into the bank, but that would require specific cooperation from the recipients trustee. I don’t see how you can do this if the recipient is of legal age and in control of the receiving account. And yes, you can gift the money into a trust, but you will need to follow certain specific rules as provided by the trustee.
Now to the gift to your spouse. You can transfer an unlimited amount of money to your spouse, and the gift rules don’t apply. A married couple is seen by the IRS as being a single financial entity, not as a pair of individuals.
To your last point about the possibility of needing to have gift money returned to you in the event you have a need, this gets messy. It’s really not a gift if there are strings attached to it, and that opens the possibility of complications with the IRS. If you think you will need the money, it’s best to not gift it to anyone. A better idea would be to set up an irrevocable trust for your own benefit. You need to discuss this thoroughly with a trust attorney, since you have very specific concerns as to how the money will be handled.
Hi Jeff – my mother wants to give my family of 4 (spouse and 2 kids) $56K towards a down payment on a house. The kids are minors (ages 6 and 10) but do have their own savings accounts that are jointly held with their parents. What is the best way to create an audit-proof paper trail? Individual $14K checks to each family member and then have the parents pull the money from the kids savings and consolidate for the down payment? Thanks for your help!
Hi CH – If your mom is married, the best way is to have your mom and her spouse each gift you and your spouse $14,000, and to do it by separate checks. So your mom gives $14k each to you and your spouse, and your mom’s spouse give $14k each to you and your wife. If your mom isn’t married, she can give $14k each to you and your spouse for 2015 (obviously you’ll have to move quickly on this one) AND 2016. Checks can be dated December 31, 2015, and January 1 2016.
Otherwise you can go with your mom gifting $14k each to you, your spouse and each of your two children. I’d make this the last resort since it will be a two step process. But I’m not a tax attorney or a CPA so you may want to get an opinion from one or the other if you’re worried about the outcome.
Can I get one bank check and make it to my son and his wife for 28,000?
Another bank check made out to my daughter for her 3 children ( for 14,000×3).?
Hi Celina – That’s not recommended. Should the IRS come knocking at your door, you’ll need a very specific paper trail that clearly separates who got what and who it came from. The combined checks will make it look as if you exceeded the gift limits.
Spend the extra time and money to be very specific with both the amounts and the donor/recipient, that way there won’t be any expensive questions later on.
My mom is trying to fund me for a down payment on a house. She can give me $14K now and $14K on January 1. Does it violate any rule if she also gives my sister $14K with the intention that my sister will then give the same $14K to me?
If you are receiving a gift as one lump sum of $42,000 to be split between you, your spouse and your child, 1) do you have to pay taxes on the gift and (2) can you receive it as a lump sum and then split in 3 between your 3 family members without paying a gift tax?
its adjusted for standard deduction
Hi Bob – If it’s a Roth IRA and you’re at least 59 1/2, you can take the distributions free from income tax. But I suspect your talking about a traditional IRA. The short answer here is “no”. Yes, you can gift the distributions from the IRA, but no, you can’t pass the tax liability on to your kids. You’ll have to pay the tax, then make the gift to your kids.
I know that’s not the answer you were looking for, but I want to keep you out of trouble with the tax guys!
I have an IRA, met all the requirements from father passing away. Even though in my 50’s, I have to start drawing on this. My wife and I planned to be low tax bracket.
Can any of this be distributed to our kids, for them to pay taxes on it rather than me?
Can my mother gift her son and his wife 14,000 each and her daughter and her husband 14,000 each in 2015 total 56,000??
@Karen Yes, she sure can.
Hi Karen – Yes, your mom can make four gifts just as you describe the split, resulting in $28,000 in gifts to each couple, with no tax liability to your mom. She can actually exceed $14,000, but if she does she will need to file IRS Form 709, and may or may not have to pay gift taxes. If she does want to gift more than $14,000 each, she will need to discuss it with her tax preparer, since he or she is familiar with your mom’s tax situation.
If I gift someone money on Christmas and the check is not cashed until the following year, does it count against 2015 or 2016?
@ Robert It’s based on the date the check was written, not cashed.
“It is the recipients who will have to pay taxes.”
In which instances do the recipients of gifts pay taxes?
Also, if someone is a beneficiary of a deceased person’s bank account, is that considered a gift or inheritance? Does the beneficiary pay taxes on it?
Hi Sue – Ironically, it’s the gift giver who pays the gift tax, not the recipient (that was a typo!). And if it’s set up right, no one has to pay any tax at all (by filing IRS form 709 the donor can apply the excess gift amount against his or her estate, which has a limit in excess of $5 million).
As to the second part of your question, the bank account would be considered to be an inheritance, since it came as a result of the previous owners death.
However, I must say I believe you’ve misunderstood the “Common Reader Question Regarding Gifting Rules”. The key word in the writer’s question is “also”.
In other words, in any given tax year, can one person gift $14,000 *each* to their son, to their daughter, to their cousin and grandchild and their UPS driver AND so on and so on….? Or is the $14,000 limit a yearly total for any taxpayer?
Another way of putting it: is the $14,000 an annual limit for the *giftor* or *for each giftee*? (though I’m pretty sure it’s the former, the absence of a crystal-clear statement on this is what’s causing folks to ask this Common Reader Question)
Hi Cully – The $14,000 gift limit is per “giftee”. So if you want to give gifts to your adult child’s family, you can gift $14k each to your child, their spouse, and both of their children, for a total of $56,000 – no gift tax will be due. Also, your spouse can do the same thing, so in theory you could transfer $112,000 to your child’s family. Does that answer the question?
Can my Mother gift 28,000 to my brother and his wife, and 28,000 to my husband and I in one year? Do checks have to be made out individually, that is split 4 ways?
Hi Jeff, thank you for your article. It is very helpful. My question is a bit complicated. My mother’s house was transferred to my disabled brother (Gulf War Disabilities) who receives SSDI. The house was transferred about 2 years ago 2013 to preserve the asset. The house is being sold now and my question has several layers to it. I am power of attorney over my brother for the sole purpose of selling the house (I live closer to it) , he lives out of state. He just recently married, within the past month. When I go to settlement should the proceeds from the sale be put in his name or my name as his POA? He plans to gift me half of the proceeds or would it make more sense for us to just have the proceeds split at the closing of the house? he would get one check and I would get one check? Does this make sense? the house is not worth a lot of money, I think after it is all said and done, we will get about $55K total to be split.
Also, a final question, can he and his wife both gift me in the same year if that is the better way to go about it?
I recently purchased a home for $153,000. I put $53,000 towards renovations. After renovations, the house has been appraised for $259,000. I plan to sell the home to my son and his wife , and wish to sell it at the appraised price. I will gift all of the equity to them (approximately $53,000) to use as a down payment. Will I have to pay taxes on the $53,000 I’m giving as a gift of equity?
I have 30,000 in stocks from a settlement. I am about to transfer to a university but the new amount that the settlement adds to my financial aid form disqualified me from recieving financial aid. If I were gift 14,000 to my brother, when would be the soonest I could gift another 14 to him?
Jeff, I have 4 children I wish to gift $10,000.00 in stock to each of them. I understand the value is under the $14,000.00 limit and does not require a gift tax. However, my oldest daughter is a Canadian citizen. How do I work this so she does not pay taxes? Is there certain forms I would need to fill out?
This is the best explanation of gifting that I’ve found. Thank you! I was wondering if a parent can gift the exclusion amount of $14,000 to each member of my family (my husband, me, and each of my two children), totaling $56,000 and NOT have to file Form 709 as with ‘gift splitting’? This would be in lieu of my in-laws gift splitting $28,000 to my husband and $28,000 to me.
My husband and I want to give a friend in China $100,000 to help him buy a house in a very expensive city. We can not do the $14,000 x 2 for multiple years. We want him to have this money now. What is the tax penalty we will face from the IRS?
I have been gifted $9,500.00 this year can i claim it on my taxes as income to increase my income?
My father is very Ill and my family is debating placing him in a home care facility. Can my father gift money to his 5 children prior to entering a home care facility or is that elegal? I understand the facility Will have all rights to his further income.
Hi! If my parents received a Gift of Equity for a house from my Uncle, could they now give the Gift of Equity to me? Thank you.
My Grandson is disabled and lives with me. He was recently approved for SSI Disability and Social Security asked me to have him help out on extra expenses and his SSI will increase which would definitely help him Social Security said. His representative payee has asked me to sign a lease/rent agreement to receive this money for his shelter and utilities expenses incurred. I have declined to sign a lease/rent agreement as this will be earned income for me to pay taxes on. I am disabled also and get SSDI and a small pension from my past employment and I have to file taxes on my pension every year. I want to help my Grandson out but I don’t want it to cost me in additional taxes as well as other problems with terms and conditions of my mortgage. Can he legally gift me his contributions for his extra expenses since it will be around $2900 a year and not over the $14,000.00 as required by the IRS?
I am a US citizen.My mother is in India.I wish to gift her USD 1,00,000/-.Pl adv the tax I wl have to pay if I do so.
Thank you Jeff for a nice article. I had a question related to gift taxes. In case if I made a gift of $6000 to my wife (married filing jointly) last year in 2014, can I deduct that amount from my taxable income? Also, does my wife need to pay income taxes on this gift? How does this affect my tax situation if any? Could you please help me?
This year me and my four siblings are expecting $20,000 each from a class action suit filed on behalf of our mother who died 3 years ago as a result of the wrong medications given.
What is the best way to have the money dispersed without being taxed improperly.
My partner orginally purchased my car due to credit issues. I was recently approved for an auto loan and paid of his loan inorder for him to transfer the title to me. Is this considered a sale? He is really giving me the car, but I want to make sure I follow the appropriate guidelines to avoid tax issues. Can this be considered gifting or is this a sale? No profit was made and it was not the intention of this ordeal.
Great article. My in-laws are giving the four of us a total of $30,000. Is there a form that we or they need to fill out? My father in-law keeps mentioning a gift certificate form that we need to get to him, but I have no idea what he’s talking about and I can’t find any info about it on the internet. Thanks for your help!
Jeff- my mother in law, age 82, just sold her house to come live with us. We are putting up an addition for her that is handicapped provisioned (walk in tub, grab bars, extra wide doors, low counters). this will add about 1000 feet to our Southern California home. The cost will be about $110,000, and she wants to pay for it. Is the best way to make this happen a 14k gift to my wife and a 14 k gift to me every year until we reach the cost? Is there a better way? What about if she dies before the total is reached? She is in ok health now, and is fully ambulatory.
Great article Jeff. Thanks for the info, it’s easy to understand. My in-laws gave us some amount of money as their wedding gift and we really do not know how to file this. BTW, if anyone needs to fill out a “IRS 709 Form ”,I found a blank form here:http://goo.gl/PI6uWv
Hi Anne – If the amount of the gift is no more than $14,000, no one has to file a return or pay a tax. In fact, your in-laws could give you and your spouse up to $56,000 without paying tax, since each parent could give up to $14,000 to both you and your spouse. Make sense?
In 12/2015, my husband and I gave our daughter 25k out of our JOINT savings account, I highlight the JOINT account part, because so little clear information is out there about gifts from a jointly owned accounts. #1. So since its from our JOINT account(not an individual account) is it considered 1/2($12,500 each) from each of us right from the get go? and since then we would each be under the 14k allowed for each of us to give, then do we have to fill out a 709? And if it so happened that each of our 1/2s was over the 14K if we had given more, would it follow that we would just each file a 709?
Correct me if I’m wrong ,but this whole marital gift splitting thing seems to be for gifts out of an individual account for the most part(which is odd for married people to have, but I guess some couples each have their own individual accounts).
Hi Chris – I think you’ll be OK. But I’d draw up separate gift letters from each of you to your daughter, conveying $12,500 each, paid by a single check issued from account XYZ (include that language in each letter). That isn’t as good as having separate checks drawn on separate accounts, but I think it will get the job done. Have your daughter sign each gift letter to confirm it. You should not have to complete Form 709. You would only have to complete the form if the gifts were over $14k each. Discuss it with your tax preparer if you feel uncomfortable with the arrangement.
My mother gifted me on several different occasions checks made payable to me in my name exceeding 14,000.00. Even though the checks were made payable to me; the monies were used for my son’s high school as well as daughters high school as well. I was not aware of the dollar sign figure for gifting. Is it a must to claim these monies on my taxes.
My step-father wants to gift me $75,000 which is essentially my inheritance money. I understand the $14,000 limit per year. I fear that over the course of 6 years, with payments of the $14,000/year I will be duped out of the money that is entitled to me. Is there some type of agreement I can have him sign so that money will still be there for me over the course of the 6 years? What are my options?
My question is as follows. Is there ever a time that the donee (receiver) would have to pay taxes on gifts beyond $14,000?
If I am given a gift (money) from multiple people over a course of a year totaling $50,000 and no one person (giver) ever exceeded a sum of $14,000 from their personal contribution, would that $50,000 that I received be taxable?
My question is we are planning to buy a house, my in laws would like to gift 100,000 to us. My mother in law is giving bank checks to me, my wife and my daughter of $14, 000 each and my father in law is giving us the same each a bank check of $14,000. For the remains $16,000 they would like to give us how can they do that without any tax.
@ Christoper They can wait until next year to gift the remainder.
Does the same apply to gift equity? Can each parent gift $14K of equity to my husband and I totaling $56K on a purchase of a home they own?
Sure Kristen, just make sure it’s properly documented so if the IRS comes around later with questions, you’ll have all the answers handy. Gifts of equity are handled much the same as cash gifts for tax purposes.